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

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  • Jerry Marmen Simanjuntak

    (College of Business and Economics The Australian National University, Australia & ABFI Institute PERBANAS, Jakarta, Indonesia)

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.

Suggested Citation

  • Jerry Marmen Simanjuntak, 2008. "Currency Demand Modeling In Estimating The Underground Economy: A Critique on ‘Excess Sensitivity’ Method and Support for VAR Framework," Working Papers in Economics and Development Studies (WoPEDS) 200806, Department of Economics, Padjadjaran University, revised Sep 2008.
    • Handle: RePEc:unp:wpaper:200806
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    File URL: http://ceds.feb.unpad.ac.id/wopeds/200806.pdf
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    References listed on IDEAS

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    6. Mariá Dolores Gadea & José Mariá Serrano-Sanz, 2002. "The hidden economy in Spain - A monetary estimation, 1964-1998," Empirical Economics, Springer, vol. 27(3), pages 499-527.
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    Cited by:

    1. Roberto Dell'Anno & Ferda Halicioglu, 2010. "An ARDL model of unrecorded and recorded economies in Turkey," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 37(6), pages 627-646, November.
    2. James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984–2006," Public Finance Review, , vol. 41(5), pages 510-543, September.
    3. James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006," Working Papers 1303, Tulane University, Department of Economics.

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    More about this item

    Keywords

    underground economy; currency demand; econometric models;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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