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Pecunia olet. Cash usage and the underground economy

Michele Giammatteo (), Stefano Iezzi () and Roberta Zizza ()
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Michele Giammatteo: Bank of Italy
Stefano Iezzi: Bank of Italy

No 649, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper explores the role of cash usage in feeding the underground economy by using a unique dataset that combines, at province level, official estimates of Italian firms’ underreporting with data on cash transactions drawn from the aggregate anti-money laundering reports filed to the Italian Financial Intelligence Unit (UIF) by banks. In order to derive causal evidence, we apply two different econometric strategies: an instrumental variable approach and a difference-in-difference approach, which exploits the change in the maximum threshold for cash transactions introduced in 2016, thereby providing a measure of the effect of such policy on tax evasion. We find that an increase in cash usage translates, other things being equal, into a higher level of underreporting by firms, and that raising the cash threshold in 2016 – a measure motivated by the objective of boosting spending – had the side effect of leading to a larger underground economy.

Keywords: shadow economy; tax evasion; cash threshold; bank branches; ATM; cashless payments (search for similar items in EconPapers)
JEL-codes: E26 E42 H26 O17 (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-eur, nep-iue, nep-mac, nep-mon and nep-pay
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