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Currency ratios and U.S. underground economic activity

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Abstract

Cagan's classic currency ratio suggests that underground economic activity in the U.S. surged starting in 1994. In contrast, we show that a ratio adjusted to take care of two distorting developments -- retail sweep programs and overseas demand for U.S. currency -- did not surge, and that movements in the adjusted ratio owe primarily to the differential effects of interest rates on currency and checkable deposits. As a result, we are skeptical of monetary-based claims that the underground economy has expanded significantly in recent years and believe that any claims that is has must rely on other evidence.

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  • Richard D. Porter & Gretchen C. Weinbach, 1998. "Currency ratios and U.S. underground economic activity," Finance and Economics Discussion Series 1998-41, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1998-41
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    References listed on IDEAS

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    1. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
    2. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303-303.
    3. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, University Library of Munich, Germany.
    4. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309.
    5. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
    6. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
    7. Kenneth Rogoff, 1998. "Blessing or curse? Foreign and underground demand for euro notes," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 13(26), pages 262-303.
    8. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
    9. Susan Pozo (ed.), 1996. "Exploring the Underground Economy," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number eue, August.
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    Cited by:

    1. Ruth A. Judson & Richard D. Porter, 2003. "Estimating the worldwide volume of counterfeit U.S. currency: data and extrapolation," Finance and Economics Discussion Series 2003-52, Board of Governors of the Federal Reserve System (U.S.).
    2. Ruth A. Judson & Richard D. Porter, 2010. "Estimating the volume of counterfeit U.S. currency in circulation worldwide: data and extrapolation," Policy Discussion Paper Series PDP-2010-02, Federal Reserve Bank of Chicago.
    3. Carrie Jankowski & Richard D. Porter & Tara N. Rice, 2007. "Against the tide—currency use among Latin American immigrants in Chicago," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 31(Q II), pages 2-21.
    4. Judson, Ruth A. & Porter, Richard D., 2004. "Currency demand by federal reserve cash office: what do we know?," Journal of Economics and Business, Elsevier, vol. 56(4), pages 273-285.

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    Keywords

    Money; Informal sector (Economics);

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