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Currency demand and the growth of the underground economy in Canada, 1991-1995

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  • Roderick Hill
  • Muhammed Kabir

Abstract

The extent to which the recent introduction of a value-added tax in Canada contributed to the growth of the underground economy remains controversial. If underground economy growth led to increased currency holdings and shifted the currency demand function, forecasts for the period after the introduction of the tax should tend to underestimate currency holdings. Using a cointegration-based error correction mechanism in vector autoregression models, currency demand is estimated using quarterly data for 1968-1990 and dynamic forecasts are made for 1991-1995. On average, currency demand is underpredicted, but by a small amount. The results are consistent with an increase in the underground economy of between 0.01 and 0.3% of GDP as a result of the new tax. If changes in marginal direct tax rates are considered, the underground economy may have grown between 0.1 and 0.7% of GDP in 1991-1995.

Suggested Citation

  • Roderick Hill & Muhammed Kabir, 2000. "Currency demand and the growth of the underground economy in Canada, 1991-1995," Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 183-192.
    • Handle: RePEc:taf:applec:v:32:y:2000:i:2:p:183-192
    DOI: 10.1080/000368400322877
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    1. Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x, December.
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    Cited by:

    1. Mack Ott & John A. Tatom, 2016. "Government Finance and the Demand for Money—The Relation between Taxation and the Acceptability of Fiat Money," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(1), pages 53-77, February.
    2. Mack Ott & John A. Tatom, 2006. "Money and Taxes - The Relation Between Financial Sector Development and Taxation," NFI Working Papers 2006-WP-09, Indiana State University, Scott College of Business, Networks Financial Institute.
    3. Breusch, Trevor, 2006. "Australia’s underground economy – redux?," MPRA Paper 9980, University Library of Munich, Germany.
    4. Ott, Mack & Tatom, John, 2015. "Government Finance and the Demand for Money - the Relationship Between Taxation and the Acceptability of Fiat Money," Studies in Applied Economics 37, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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