Currency Demand Modeling In Estimating The Underground Economy: A Critique on ‘Excess Sensitivity’ Method and Support for VAR Framework
The ‘excess sensitivity’ as the method of estimating the underground economy by using currency modeling is found to be unreliable. In general, there are two major weaknesses in the method. First, the key assumption, in assuming the equality of velocity of money between the official economy and the underground economy, is very unrealistic. Second, the method is found to be non robust due to the unit measurement and scale change. More specifically, the application of the excess sensitivity method using the single-step error correction model (ECM) in Bajada’s paper is very weak because there is no cointegration analysis as the prerequisite of ECM modeling. In conclusion, the possibility of using a currency demand approach in estimating the size of the underground economy is still unclear like ‘black box’, and in particular, the excess sensitivity method should be thoroughly revised.
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- Vito Tanzi, 1986. "The Underground Economy in the United States: Reply to Comments by Feige, Thomas, and Zilberfarb," IMF Staff Papers, Palgrave Macmillan, vol. 33(4), pages 799-811, December.
- Bajada, Christopher, 1999. "Estimates of the Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 369-84, December.
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- David E. A. Giles, 1999.
"Modelling the Hidden Economy and the Tax-Gap in New Zealand,"
Econometrics Working Papers
9905, Department of Economics, University of Victoria.
- David E. A. Giles, 1999. "Modelling the hidden economy and the tax-gap in New Zealand," Empirical Economics, Springer, vol. 24(4), pages 621-640.
- David E. A. Giles, 1998. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers 9810, Department of Economics, University of Victoria.
- David Giles, 1997. "Causality between the measured and underground economies in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 63-67.
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