THE MONETARY METHOD AND THE SIZE OF THE SHADOW ECONOMY: A CRITICAL ASSESSMENT

Hildegart A. Ahumada · Facundo Alvaredo · Alfredo Canavese

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Taxation and Compliance Studies Economic and Fiscal Studies Crime, Illicit Activities, and Governance

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.

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References

2000Shadow Economies: Size, Causes, and Consequences 1977The Subterranean Economy 1999Uses and Abuses of Estimates of the Underground Economy 1958The Demand for Currency Relative to the Total Money Supply 1983The Underground Economy in the United States: Annual Estimates, 1930-80 (L'economie clandestine aux Etats-Unis: estimations annuelles, 1930-80) (La "economia subterranea" de Estados Unidos: Estimaciones anuales, 1930-80)1979How Big Is the Irregular Economy?1983The Underground Economy in the United States and Abroad.1999Quantifying the Black Economy: ‘measurement Without Theory’ Yet Again?

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2015Reflections on the Meaning and Measurement of Unobserved Economies: What Do We Really Know About the 'Shadow Economy'?2014The Shadow Economy in Colombia: Size and Effects on Economic Growth

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