Currency Demand Modeling In Estimating The Underground Economy: A Critique on ‘Excess Sensitivity’ Method and Support for VAR Framework

Jerry M. Simanjuntak ()
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Jerry M. Simanjuntak: College of Business and Economics The Australian National University, Australia & ABFI Institute PERBANAS, Jakarta, Indonesia

No 200806, Working Papers in Economics and Development Studies (WoPEDS) from Department of Economics, Padjadjaran University

Abstract: The ‘excess sensitivity’ as the method of estimating the underground economy by using currency modeling is found to be unreliable. In general, there are two major weaknesses in the method. First, the key assumption, in assuming the equality of velocity of money between the official economy and the underground economy, is very unrealistic. Second, the method is found to be non robust due to the unit measurement and scale change. More specifically, the application of the excess sensitivity method using the single-step error correction model (ECM) in Bajada’s paper is very weak because there is no cointegration analysis as the prerequisite of ECM modeling. In conclusion, the possibility of using a currency demand approach in estimating the size of the underground economy is still unclear like ‘black box’, and in particular, the excess sensitivity method should be thoroughly revised.

Keywords: underground economy; currency demand; econometric models (search for similar items in EconPapers)
JEL-codes: C51 E26 E41 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2008-09, Revised 2008-09
New Economics Papers: this item is included in nep-mac, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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