Shadow Economy: Does it Matter for Money Velocity?

Luisanna Onnis, Patrizio Tirelli

Research output: Contribution to journalArticle

Abstract

The standard approach adopted in the literature exploits data on money demand to extrapolate the dynamics of the unobserved economic activity. In this paper, we explore instead the long-run effects of shadow economy measures—obtained independently from money demand functions—on the velocity of circulation of money. Empirical evidence from a panel covering 43 countries over the period 1981–2005 shows that variations in the relative size of the unrecorded sector have a negative and significant effect on the velocity of circulation of money. This is because, ceteris paribus, the higher the share of the shadow economy, the higher the demand for currency and therefore the lower the velocity of circulation of money. The negative relation between underground economic activity and velocity of circulation of money is robust to the use of different shadow economy estimates, to a sub-sample analysis and to the inclusion of a time trend.
LanguageEnglish
Pages839-858
Number of pages20
JournalEmpirical Economics
Volume49
Issue number3
Early online date10 Feb 2015
DOIs
Publication statusPublished - Nov 2015
Externally publishedYes

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shadow economy
money
Money Demand
Economics
Extrapolate
Currency
demand
Long-run
Sector
Covering
Inclusion
currency
economics
Money
Shadow economy
inclusion
Estimate
trend

Cite this

Onnis, Luisanna ; Tirelli, Patrizio. / Shadow Economy: Does it Matter for Money Velocity?. In: Empirical Economics. 2015 ; Vol. 49, No. 3. pp. 839-858.
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Shadow Economy: Does it Matter for Money Velocity? / Onnis, Luisanna; Tirelli, Patrizio.

In: Empirical Economics, Vol. 49, No. 3, 11.2015, p. 839-858.

Research output: Contribution to journalArticle

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