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The monetary method and the size of the shadow economy: A critical assessment

Author

Listed:
  • Hildegart Ahumada

    (Universidad Torcuato Di Tella)

  • Facundo Alvaredo

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, CONICET - Consejo Nacional de Investigaciones Científicas y Técnicas [Buenos Aires])

  • Alfredo Canavese

    (Universidad Torcuato Di Tella, CONICET - Consejo Nacional de Investigaciones Científicas y Técnicas [Buenos Aires])

Abstract

A widely applied approach to measure the size of the shadow economy, known as the "monetary method" or the "currency approach," is based on econometric estimates of the demand for money. These estimates are used to get the currency held by economic agents in excess of the amount they need to finance registered transactions. This excess of currency multiplied by the income-velocity of circulation (assumed to be equal in the registered and shadow economies) gives a measure of the hidden GDP. This paper shows that the monetary method only produces coherent estimates if the income-elasticity of the demand for currency is one and suggests a way to correct the estimated size of the shadow economy when such elasticity is not one. The correction is applied to existent measures for different countries.

Suggested Citation

  • Hildegart Ahumada & Facundo Alvaredo & Alfredo Canavese, 2007. "The monetary method and the size of the shadow economy: A critical assessment," PSE-Ecole d'économie de Paris (Postprint) hal-00812851, HAL.
    • Handle: RePEc:hal:pseptp:hal-00812851
    DOI: 10.1111/j.1475-4991.2007.00234.x
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