Currency Ratios and U.S. Underground Economic Activity
10 Pages Posted: 25 Feb 1999
Date Written: August 5, 1998
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: Suggested Citation