Estimating the size of Romanian shadow economy using Gutmann’s simple currency ratio approach

Currency is widely assumed to have a comparative advantage over checks for the payment of purchases of goods and services that individuals wish to conceal from the authorities. A rise in currency stocks and payments may be taken as a rough indicator of the extent to which these transactions may not be reported to government authorities. The paper aims to estimate the size of subterranean economy using the simple currency ratio method of Gutmann for quarterly data covering the period 2000-2010. Thus, the study analyzes the ratio of currency to demand deposits in order to estimate the amount of economic activity in the subterranean economy. The empirical results point out that the illegal economic activities are about four billion RON at the middle of 2000; it constitutes 17.4 percent of the official GNP. During the period 2001-2004, illegal economic activities follow a downward path reaching 9.5% of official GNP at the end of 2004. For the period 2004-2006, unofficial economic activities fit a slow upward trend until the second quarter of 2006, for which the size of subterranean economy reaches the value of 12.3% of official GNP. Beginning with 2007, the amount of illegal activities as % of official GNP begin to decrease until the third quarter of 2008, which is the base year in which no shadow economy is supposed to exist. For the last years, the ratio of subterranean economy to official economy increased slowly, reaching about 9.3% in the second quarter of 2010.