The Monetary Method and the Size of the Shadow Economy: A Critical Assessment

9 Pages Posted: 24 May 2007

See all articles by Hildegart Ahumada

Hildegart Ahumada

Universidad Torcuato Di Tella - School of Government

Facundo Alvaredo

Ecole Normale Superieure (PSE-ENS)

Alfredo Canavese

Universidad Torcuato Di Tella

Abstract

A widely applied approach to measure the size of the shadow economy, known as the "monetary method" or the "currency approach," is based on econometric estimates of the demand for money. These estimates are used to get the currency held by economic agents in excess of the amount they need to finance registered transactions. This excess of currency multiplied by the income-velocity of circulation (assumed to be equal in the registered and shadow economies) gives a measure of the hidden GDP. This paper shows that the monetary method only produces coherent estimates if the income-elasticity of the demand for currency is one and suggests a way to correct the estimated size of the shadow economy when such elasticity is not one. The correction is applied to existent measures for different countries.

Suggested Citation

Ahumada, Hildegart and Alvaredo, Facundo and Canavese, Alfredo, The Monetary Method and the Size of the Shadow Economy: A Critical Assessment. Review of Income and Wealth, Vol. 53, No. 2, pp. 363-371, June 2007, Available at SSRN: https://ssrn.com/abstract=988588 or http://dx.doi.org/10.1111/j.1475-4991.2007.00234.x

Hildegart Ahumada

Universidad Torcuato Di Tella - School of Government ( email )

C1428ATG Buenos Aires
Argentina

Facundo Alvaredo (Contact Author)

Ecole Normale Superieure (PSE-ENS) ( email )

48 Boulevard Jourdan
75014 Paris
France

Alfredo Canavese

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina

HOME PAGE: http://www.bcu.gub.uy/autoriza/peiees/jor/2006/iees03j3120806.pdf

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