A methodology for determining the ‘cash economy’ in the European Union via an announcement effect

Abstract

Abstract:One of the most important policy considerations currently for all governments across the EU concerns the need to increase tax revenue so as to reduce their unsustainable budget deficits. One key policy involves reducing the amount of revenue lost as a result of the 'cash economy', but before this is possible they first need to have some idea of its size. This study provides evidence of the importance of the cash economy across the EU and suggests that changes in house prices, when the Euro was formed in 1999 can be used as a basis to measure its magnitude. These results build on the theoretical model on how individuals who wished to hide their domestic cash from the authorities when the European single currency was formed in 1999, would have needed to acquire a physical asset, most likely property. This implies changes in property prices between the announcement of the Euro and its implementation reflect the level of wealth being hidden in this way and therefore the extent of the cash economy.