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Measuring the Underground Economy with the Currency Demand Approach: A Reinterpretation of the Methodology, With an Application to Italy

Listed author(s):
  • Guerino Ardizzi
  • Carmelo Petraglia
  • Massimiliano Piacenza
  • Gilberto Turati

type="main"> We contribute to the debate on how to assess the size of the underground (or shadow) economy by proposing a reinterpretation of the traditional Currency Demand Approach (CDA) à la Tanzi. In particular, we introduce three main innovations. First, we take a direct measure of the value of cash transactions—the flow of cash withdrawn from bank accounts relative to total non-cash payments—as the dependent variable in the money demand equation. This allows us to avoid unrealistic assumptions on the velocity of money and the absence of any irregular transaction in a given year, overcoming two severe critiques to the traditional CDA. Second, in place of the tax burden level, usually intended as the main motivation for non-compliance, we include among the covariates two direct indicators of detected tax evasion. Finally, we control also for the role of illegal production considering crimes like drug dealing and prostitution, which—jointly with the shadow economy—contributes to the larger aggregate of the non-observed economy and represents a significant component of total cash payments. We propose then an application of this “modified CDA” to a panel of 91 Italian provinces for the years 2005–08.

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File URL: http://hdl.handle.net/10.1111/roiw.12019
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Article provided by International Association for Research in Income and Wealth in its journal Review of Income and Wealth.

Volume (Year): 60 (2014)
Issue (Month): 4 (December)
Pages: 747-772

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Handle: RePEc:bla:revinw:v:60:y:2014:i:4:p:747-772
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  1. Roberta Zizza, 2002. "Metodologie di stima dell�economia sommersa: un�applicazione al caso italiano," Temi di discussione (Economic working papers) 463, Bank of Italy, Economic Research and International Relations Area.
  2. Fernando Alvarez & Francesco Lippi, 2009. "Financial Innovation and the Transactions Demand for Cash," Econometrica, Econometric Society, vol. 77(2), pages 363-402, March.
  3. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers.
  4. Chiarini Bruno & Marzano Elisabetta, 2004. "Dimensione e dinamica dell'economia sommersa: un approfondimento del "currency demand approach"," Politica economica, Società editrice il Mulino, issue 3, pages 303-334.
  5. Michael Pickhardt & Jordi Sarda, 2011. "The size of the underground economy in Germany: a correction of the record and new evidence from the modified-cash-deposit-ratio approach," European Journal of Law and Economics, Springer, vol. 32(1), pages 143-163, August.
  6. Matthias Drehmann & Charles Goodhart, 2000. "Is Cash Becoming Technologically Outmoded Or Does it Remain Necessary to Facilitate," FMG Discussion Papers dp358, Financial Markets Group.
  7. Benno Torgler, 2003. "Tax Morale and Institutions," CREMA Working Paper Series 2003-09, Center for Research in Economics, Management and the Arts (CREMA).
  8. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053, December.
  9. Maurizio Bovi & Laura Castellucci, 2001. "Cosa sappiamo dell'economia sommersa in Italia al di là dei luoghi comuni? Alcune proposizioni empiricamente fondate," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2001(6).
  10. J. Ferwerda & I. Deleanu & B. Unger, 2010. "Revaluating the Tanzi-Model to Estimate the Underground Economy," Working Papers 10-04, Utrecht School of Economics.
  11. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Gilberto Turati, 2013. "L’economia non osservata fra evasione e crimine: una rivisitazione del Currency Demand Approach con una applicazione al contesto italiano," Rivista di Politica Economica, SIPI Spa, issue 1, pages 229-269, January-M.
  12. Malte Krueger & Charles Goodhart, 2001. "The Impact of Technology on Cash Usage," FMG Discussion Papers dp374, Financial Markets Group.
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