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  • Shadow economy: does it matter for money velocity

    Author(s)
    Onnis, Luisanna
    Tirelli, Patrizio
    Griffith University Author(s)
    Tirelli, Patrizio
    Year published
    2015
    Metadata
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    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 ...
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    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.
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    Journal Title
    Empirical Economics
    Volume
    49
    Issue
    3
    DOI
    https://doi.org/10.1007/s00181-015-0914-2
    Subject
    Economics
    Applied economics not elsewhere classified
    Publication URI
    http://hdl.handle.net/10072/336477
    Collection
    • Journal articles

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