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The Monetary Method to Measure the Size of the Shadow Economy. A Critical Examination of its Use

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  • Hildegart Ahumada
  • Facundo Alvaredo
  • Alfredo Canavese

Abstract

The monetary method is a widely used approach to measure the size of the shadow economy. It is based on the hypothesis that cash is used to make transactions that agents want to keep hidden from official records. This paper (i) provides a formal aggregation framework which stylizes the steps usually followed in empirical applications and makes clear the assumptions required by this method, (ii) demonstrates that the method has been used implicitly assuming that the income-elasticity of currency demand is one even in those cases in which its econometric estimate is not one, (iii) shows that when the money demand function used to estimate the size of the shadow economy includes the lagged dependent variable, the need to assume a known initial condition reappears, as it was the case in the early monetary method.

Suggested Citation

  • Hildegart Ahumada & Facundo Alvaredo & Alfredo Canavese, 2009. "The Monetary Method to Measure the Size of the Shadow Economy. A Critical Examination of its Use," Revue économique, Presses de Sciences-Po, vol. 60(5), pages 1069-1078.
  • Handle: RePEc:cai:recosp:reco_605_1069
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    1. repec:eee:quaeco:v:66:y:2017:i:c:p:149-158 is not listed on IDEAS
    2. Awadh Ahmed Mohammed Gamal & Jauhari B.Dahalan, 2015. "Estimating the Size of the Underground Economy in Saudi: Evidence from Gregory-Hansen Cointegration Based Currency Demand Approach," Abstract of Economic, Finance and Management Outlook, Conscientia Beam, vol. 3, pages 1-6.

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