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Measuring the underground economy with the currency demand approach: a reinterpretation of the methodology, with an application to Italy

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  • Guerino Ardizzi

    () (Banca d'Italia)

  • Carmelo Petraglia

    () (University of Basilicata)

  • Massimiliano Piacenza

    () (University of Torino)

  • Gilberto Turati

    () (University of Torino)

Abstract

We contribute to the debate on how to assess the size of the underground or shadow economy with a reinterpretation of the traditional Currency Demand Approach (CDA) � la Tanzi. We introduce three main innovations. First, we take as dependent variable in the money demand equation a direct measure of the value of cash transactions: the flow of cash withdrawn from current accounts relative to total non-cash payments. This avoids use of the Fisher equation and so overcomes two severe criticisms of the traditional CDA. Second, instead of the tax burden, usually taken as the main motive for non-compliance, we include among the covariates two direct indicators of detected tax evasion. Finally, we also control for the role of illegal economic activity, such as drug dealing and prostitution, which � jointly with the shadow economy � contributes to the larger aggregate of the unobserved economy and represents a significant component of total cash payments. We then propose an application of this �modified CDA� to a panel of 91 Italian provinces for the years 2005-2008.

Suggested Citation

  • Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Gilberto Turati, 2012. "Measuring the underground economy with the currency demand approach: a reinterpretation of the methodology, with an application to Italy," Temi di discussione (Economic working papers) 864, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_864_12
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    Cited by:

    1. Schneider Friedrich & Hametner Bettina, 2014. "The Shadow Economy in Colombia: Size and Effects on Economic Growth," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 20(2), pages 1-33, April.
    2. Emmanuele Bobbio, 2016. "Tax evasion, firm dynamics and growth," Questioni di Economia e Finanza (Occasional Papers) 357, Bank of Italy, Economic Research and International Relations Area.
    3. Contini, Bruno & Grand, Elisa, 2014. "Estimating Workforce Disposal in the Italian Labour Market," IZA Policy Papers 79, Institute for the Study of Labor (IZA).
    4. Salahodjaev, Raufhon, 2015. "Intelligence and Shadow Economy: a Cross-Country Empirical Assessment," MPRA Paper 61976, University Library of Munich, Germany.
    5. Giacomo Di Gennaro & Antonio La Spina, 2016. "The costs of illegality: a research programme," Global Crime, Taylor & Francis Journals, vol. 17(1), pages 1-20, January.
    6. Gilbert Mbara & Ryszard Kokoszczynski & Joanna Tyrowicz, 2017. "Striking a balance: optimal tax policy with labor market duality," GRAPE Working Papers 16, GRAPE Group for Research in Applied Economics.
    7. repec:eee:ecmode:v:68:y:2018:i:c:p:514-528 is not listed on IDEAS
    8. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Friedrich Schneider & Gilberto Turati, 2013. "Money Laundering as a Financial Sector Crime. A New Approach to Measurement, with an Application to Italy," Working papers 018, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    9. Pappa, Evi & Sajedi, Rana & Vella, Eugenia, 2015. "Fiscal consolidation with tax evasion and corruption," Journal of International Economics, Elsevier, vol. 96(S1), pages 56-75.
    10. B. Contini & J. Ignacio Garcia Perez & T. Pusch & R. Quaranta, 2017. "New Approaches to the Study of Long Term Non-Employment Duration in Italy, Germany and Spain," Working Papers 2017-14, FEDEA.
    11. Sharma, Chandan, 2016. "Estimating the Size of Black Economy in India," MPRA Paper 75211, University Library of Munich, Germany.
    12. Mai Hassan & Friedrich Schneider, 2016. "Modelling the Egyptian Shadow Economy: A Currency Demand and A MIMIC Model Approach," CESifo Working Paper Series 5727, CESifo Group Munich.
    13. Emmanuele Bobbio, 2017. "Tax Evasion, Firm Dynamics and Growth," 2017 Meeting Papers 683, Society for Economic Dynamics.
    14. Misbah Kiani & Adeel Ahmed & Khalid Zaman, 2015. "Combining qualitative and quantitative approaches for measuring underground economy of Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(1), pages 295-317, January.
    15. Grech, Aaron George, 2014. "The demand for currency in Malta," MPRA Paper 53878, University Library of Munich, Germany.
    16. Leonardo Ghezzi & Letizia Ravagli & Stefano Rosignoli & Nicola Sciclone, 2013. "The estimate of the tax gap: An application in Tuscany," Politica economica, Società editrice il Mulino, issue 1, pages 91-118.
    17. Contini, Bruno & Quaranta, Roberto, 2017. "Explaining Non-Employment Magnitude and Duration: The Case of Italy," IZA Discussion Papers 10728, Institute for the Study of Labor (IZA).
    18. Mai HASSAN & Friedrich SCHNEIDER, 2016. "Modelling the Egyptian Shadow Economy: A MIMIC model and A Currency Demand approach," Journal of Economics and Political Economy, KSP Journals, vol. 3(2), pages 309-339, June.
    19. Umberto Galmarini & Simone Pellegrino & Massimiliano Piacenza & Gilberto Turati, 2014. "The runaway taxpayer," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 468-497, June.
    20. Mukherjee, Sacchidananda & Rao, R. Kavita, 2015. "Estimation of Unaccounted Income Using Transport as a Universal Input: A Methodological Note," Working Papers 15/146, National Institute of Public Finance and Policy.
    21. Niebel, Thomas, 2018. "ICT and economic growth – Comparing developing, emerging and developed countries," World Development, Elsevier, vol. 104(C), pages 197-211.
    22. Matteo Bugamelli & Francesca Lotti & Monica Amici & Emanuela Ciapanna & Fabrizio Colonna & Francesco D’Amuri & Silvia Giacomelli & Andrea Linarello & Francesco Manaresi & Giuliana Palumbo & Filippo Sc, 2018. "Productivity growth in Italy: a tale of a slow-motion change," Questioni di Economia e Finanza (Occasional Papers) 422, Bank of Italy, Economic Research and International Relations Area.
    23. repec:kap:itaxpf:v:25:y:2018:i:2:d:10.1007_s10797-017-9450-7 is not listed on IDEAS
    24. Barbara Annicchiarico & Claudio Cesaroni, 2018. "Tax reforms and the underground economy: a simulation-based analysis," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 458-518, April.
    25. Donal Mac Géidigh & Friedrich Schneider & Matthias Blum, 2016. "Grey Matters: Charting the Development of the Shadow Economy," CESifo Working Paper Series 6234, CESifo Group Munich.

    More about this item

    Keywords

    underground economy; currency demand approach; cash transactions; tax evasion; illegal production;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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