Currency Ratios and U.S. Underground Economic Activity

10 Pages Posted: 25 Feb 1999

See all articles by Richard D. Porter

Richard D. Porter

Federal Reserve Bank of Chicago

Gretchen C. Weinbach

Board of Governors of the Federal Reserve System

Date Written: August 5, 1998

Abstract

Cagan's classic currency ratio suggests that underground economic activity in the U.S. surged starting in 1994. In contrast, we show that a ratio adjusted to take care of two distorting developments--retail sweep programs and overseas demand for U.S. currency--did not surge, and that movements in the adjusted ratio are owed primarily to the differential effects of interest rates on currency and checkable deposits. As a result, we are skeptical of monetary-based claims that the underground economy has expanded significantly in recent years and believe that any claims that it has must rely on other evidence.

JEL Classification: E69

Suggested Citation

Porter, Richard D. and Weinbach, Gretchen Cope, Currency Ratios and U.S. Underground Economic Activity (August 5, 1998). Available at SSRN: https://ssrn.com/abstract=141848 or http://dx.doi.org/10.2139/ssrn.141848

Richard D. Porter (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Gretchen Cope Weinbach

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2841 (Phone)

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