Money demand and the shadow economy: empirical evidence from OECD countries

Helmut Herwartz (), Jordi Sardà () and Bernd Theilen ()
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Helmut Herwartz: Georg-August-University Göttingen

Empirical Economics, 2016, vol. 50, issue 4, No 20, 1627-1645

Abstract: Abstract In this article, we analyze whether shadow economic activity has had a measurable influence on the demand for M1 and currency in a cross section of OECD countries since the 1970s. Since shadow economic activity is not directly observable, we use several indicator variables that are positively related to shadow economic activity. We find that, indeed, some of these variables have had a significant influence on M1 money and currency demand in OECD countries over the last decades. Our results indicate that the omission of unofficial activities leads to a considerable overestimation of the income elasticity and the interest semi-elasticity of M1 and currency demand. Measuring accurately the size of shadow economic activity is therefore an important task for central banks to determine the optimal stock of money.

Keywords: Money demand; Currency demand; Shadow economy; OECD panel data; E41; O17; C32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s00181-015-0970-7

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