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Measuring the Shadow Economy with the Currency Demand Approach - A Reinterpretation of the methodology, with an application to Italy


  • Guerino Ardizzi

    () (Bank of Italy)

  • Carmelo Petraglia

    () (University of Napoli Federico II)

  • Massimiliano Piacenza

    () (Department of Economics and Public Finance "G. Prato", University of Torino)

  • Gilberto Turati

    () (Department of Economics and Public Finance "G. Prato", University of Torino)


We contribute to the debate on how to assess the size of the shadow economy by proposing a reinterpretation of the traditional Currency Demand Approach (CDA) a là Tanzi. In particular, we introduce three main innovations. First, we take a direct measure of cash transactions (the flow of cash withdrawn from bank accounts relative to total noncash payments) as the dependent variable in the money demand equation. This allows us to avoid using the Fisher equation, overcoming two severe critiques to the traditional CDA. Second, we include among covariates two distinct measures of 'detected' tax evasion, in place of the tax burden level. Finally, we control also for a new 'criminal' component of the shadow economy, considering money demand for illegal activities like drug dealing and prostitution. We 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, 2011. "Measuring the Shadow Economy with the Currency Demand Approach - A Reinterpretation of the methodology, with an application to Italy," Working papers 22, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  • Handle: RePEc:tur:wpaper:22

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    References listed on IDEAS

    1. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers.
    2. Schneider Friedrich, 2010. "The Influence of Public Institutions on the Shadow Economy: An Empirical Investigation for OECD Countries," Review of Law & Economics, De Gruyter, vol. 6(3), pages 441-468, December.
    3. Benno Torgler, 2003. "Tax Morale and Institutions," CREMA Working Paper Series 2003-09, Center for Research in Economics, Management and the Arts (CREMA).
    4. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters,in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
    5. Fernando Alvarez & Francesco Lippi, 2009. "Financial Innovation and the Transactions Demand for Cash," Econometrica, Econometric Society, vol. 77(2), pages 363-402, March.
    6. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2009. "How do institutions affect corruption and the shadow economy?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 773-796, December.
    7. Michael Pickhardt & Jordi Sarda, 2011. "The size of the underground economy in Germany: a correction of the record and new evidence from the modified-cash-deposit-ratio approach," European Journal of Law and Economics, Springer, vol. 32(1), pages 143-163, August.
    8. Cameron,A. Colin & Trivedi,Pravin K., 2008. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9787111235767, March.
    9. Hildegart Ahumada & Facundo Alvaredo & Alfredo Canavese, 2007. "The Monetary Method And The Size Of The Shadow Economy: A Critical Assessment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(2), pages 363-371, June.
    10. Michael Pickhardt & Jordi Sarda Pons, 2006. "Size and scope of the underground economy in Germany," Applied Economics, Taylor & Francis Journals, vol. 38(14), pages 1707-1713.
    11. Malte Krueger & Charles Goodhart, 2001. "The Impact of Technology on Cash Usage," FMG Discussion Papers dp374, Financial Markets Group.
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    13. Roberta Zizza, 2002. "Metodologie di stima dell�economia sommersa: un�applicazione al caso italiano," Temi di discussione (Economic working papers) 463, Bank of Italy, Economic Research and International Relations Area.
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    More about this item


    Shadow economy; Currency demand approach; Cash transactions; Evasion; Crime;

    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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