Informal Economy Rate and Largest Banknote Denomination

The rapidly growing literature on informality has demonstrated its effects on various aspects of countries' economies. This paper aims to build upon the existing literature on banknote denominations and informality by examining the relation between the value of the largest banknote denominations in countries (expressed in US dollars) and their GDP per capita, inflation rate, percentage of people using credit cards, and central bank independence index using cross-country data from 104 countries. This paper uses different methodologies such as plain correlation and least squares regression in order to find the correlation between the aforementioned variables. The results indicate a negative correlation between informal sector size and the value of the largest banknote denomination, suggesting that countries with larger informal sectors tend to have lower-value banknotes. In conclusion, this paper suggests that the informal sector is one of the underlying factors that explain why governments are averse to new larger banknote denominations and how this is related to the correlation between the informal sector percentage and the value of the largest banknote denomination in USD. Adding onto this, the paper also compares and contrasts the results of the observations obtained with the current literature on informality and banknote denominations.