Measuring the Shadow Economy with the Currency Demand Approach - A Reinterpretation of the methodology, with an application to Italy

Guerino Ardizzi (), Carmelo Petraglia, Massimiliano Piacenza and Gilberto Turati ()

No 22, Working papers from Former Department of Economics and Public Finance "G. Prato", University of Torino

Abstract: We contribute to the debate on how to assess the size of the shadow economy by proposing a reinterpretation of the traditional Currency Demand Approach (CDA) a là Tanzi. In particular, we introduce three main innovations. First, we take a direct measure of cash transactions (the flow of cash withdrawn from bank accounts relative to total noncash payments) as the dependent variable in the money demand equation. This allows us to avoid using the Fisher equation, overcoming two severe critiques to the traditional CDA. Second, we include among covariates two distinct measures of 'detected' tax evasion, in place of the tax burden level. Finally, we control also for a new 'criminal' component of the shadow economy, considering money demand for illegal activities like drug dealing and prostitution. We propose an application of this 'modified-CDA' to a panel of 91 Italian provinces for the years 2005-2008.

Keywords: Shadow economy; Currency demand approach; Cash transactions; Evasion; Crime (search for similar items in EconPapers)
JEL-codes: E26 E41 H26 K42 O17 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011-09
New Economics Papers: this item is included in nep-eec and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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