New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"

Edgar Feige

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the ‘currency enigma” which arises because despite financial innovation that has created important new substitutes for cash usage, U.S. per capita currency holdings now amount to $2700. American households and businesses admit to holding only 15 percent of the stock of currency outside of the banking system. Some fraction of unaccounted for currency is held overseas (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions involving incomes that are not reported to the IRS (the underground economy hypothesis). We first revisit the longstanding controversy concerning the fraction of U.S. currency held abroad and find that newly revised estimates of U.S. overseas currency stocks estimates the fraction overseas at 37 percent, rather than the widely cited figure of 65 percent. A more refined proxy places the fraction abroad closer to 30 percent. New estimates of overseas holdings permit calculation of domestic currency holdings, as well as narrow and broad measures of domestic monetary aggregates. These are tested to determine their ability to predict fluctuations in real output and prices. The domestic currency figures are then used to estimate the current amount of “unreported income” which approaches $2 trillion, implying a “tax gap” in 2008 of between $446- $490 billion.

Keywords: Underground economy; unreported income; unobserved economy; tax gap; cash; overseas currency, monetary aggregates; output; inflation. (search for similar items in EconPapers)
JEL-codes: E26 E41 E52 H26 O17 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/19564/1/MPRA_paper_19564.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/30353/1/MPRA_paper_30353.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/30353/2/Feigefin.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/30353/3/Feigefin.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:19564

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().