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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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    Cited by:

    1. Lizina, Olga M., 2020. "State of shadow economic activity in Russian regions," Economic Consultant, Roman I. Ostapenko, vol. 32(4), pages 73-82.
    2. Gamal, Awadh Ahmed Mohammed & Rambeli, Norimah & Abdul Jalil, Norasibah & Kuperan Viswanathan, K., 2019. "A modified Currency Demand Function and the Malaysian shadow economy: Evidence from ARDL bounds testing approach," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 266-281.
    3. Awadh Ahmed Mohammed Gamal & Jauhari Dahalan & K. Kuperan Viswanathan, 2020. "An econometric analysis of the underground economy and tax evasion in Kuwait," International Journal of Business and Globalisation, Inderscience Enterprises Ltd, vol. 25(3), pages 307-331.
    4. Hajilee, Massomeh & Stringer, Donna Y. & Metghalchi, Massoud, 2017. "Financial market inclusion, shadow economy and economic growth: New evidence from emerging economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 149-158.
    5. Psychoyios, Dimitrios & Missiou, Olympia & Dergiades, Theologos, 2021. "Energy based estimation of the shadow economy: The role of governance quality," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 797-808.
    6. Berg, Lyudmila N., 2020. "Systematization of the EAEU legal sources in the field of regulation of the service market in science," Economic Consultant, Roman I. Ostapenko, vol. 32(4), pages 83-93.
    7. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).
    8. Massomeh Hajilee & Farhang Niroomand, 2018. "The impact of interest rate volatility on financial market inclusion: evidence from emerging markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 352-368, April.

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