 Money Multiplier Bias Due to Informal Sector: An Extension of the Existing Money MultiplierKhurrum S. Mughal, Friedrich Schneider (), Faheem Aslam and Alishba Tahir South Asian Journal of Macroeconomics and Public Finance, 2021, vol. 10, issue 2, 139-157 Abstract: To demonstrate the impact of informal economy on the official money multiplier in currency supply, we present an extension of the basic money multiplier model. The influence of economic policies may differ if they are based only on official statistics without considering the informal sector. Since most of the activities in informal sector are hidden from authorities, it is widely assumed that these activities are based on cash transactions, a part of total currency that cannot be attracted towards deposits due to the holder’s fear of prosecution and taxation, etc. Therefore, it is expected that such currency holdings can give biased results by playing a role in the money multiplier, a phenomenon that is usually ignored while attempting to alter money supply. The article also indicates that because of informal sector, the currency deposit ratio in the money multiplier is smaller than expected (depending on size of the informal sector), leading to a larger multiplier effect. JEL Classifications: E26, E51, O17 Keywords: Informal economy; shadow economy; money multiplier (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:sae:smppub:v:10:y:2021:i:2:p:139-157 Access Statistics for this article More articles in South Asian Journal of Macroeconomics and Public Finance |
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