Cash in Circulation and the Shadow Economy: An Empirical Investigation for Euro Area Countries and Beyond

Abstract

We analyze the net cash issues of the national euro area central banks in relation to the dynamics of the shadow economy within a panel cointegration framework. Besides the total net issues, we distinguish between large, medium and small euro banknotes and take due account of other determinants of cash demand as well as country-specific repercussions of the financial crisis of 2008. We find a significant and positive relationship between the net issues and the size of the shadow economy only for medium notes. And this result seems to be driven by the smaller euro area countries. The use of large and small denominations is obviously not driven by the shadow economy. For comparison purposes, we also present panel results for eight non-euro area countries (

Payment Innovations, the Shadow Economy and Cash Demand of Households in Euro Area Countries

“…These are the share of self-employed and the number of drug-related criminal offences in the first model and the burden with taxes and social security contributions in the second. Seitz et al (2020) use the same direct estimates as in the present paper and find a significant influence of the shadow economy only for the medium denominations (€ 50, € 100) and the smaller euro area countries. However, the magnitudes are relatively modest.…”

“…This is in line with Amromin & Chakravorti (2009) and Bartzsch & Seitz (2016), but in contrast to Assenmacher, et al (2019) and Bartzsch, et al (2019) who distinguish between different denominational groups of all cash holding sectors, but also to Herwartz, et al (2016) who model total currency in circulation. Therefore, one reason for our result might be that we are not able to distinguish between different denominations in our framework (see Dunbar &Jones, 2018 andSeitz, et al, 2020). 17 Obviously, opportunity costs do not play a major role in total cash holdings of euro area households.…”

“…In contrast, Bartzsch, et al (2013), Bartzsch & Seitz (2016), Deutsche Bundesbank (2018) and Rua (2018) analyze the net issues of individual euro area countries, namely Germany and Portugal. Seitz, et al (2020) consider the net issues of a panel of euro area countries. All these papers reveal that the cash holding motives are relevant to differing degrees for the different denominations.…”

“…First, we are the first to use flow-offunds data on private households' cash holdings in each of the 19 euro area countries to analyze the drivers of cash demand within a currency union. Up to now, only the cumulated national net issues are taken as a proxy of cash demand (see for the euro area Bartzsch, et al, 2013;Rua, 2018;Seitz, et al, 2020; for the US, Judson & Porter, 2001, ch 6.4) or, the euro area as a whole is investigated (see Fischer, et al, 2004;Rua, 2019). Second, and following Seitz, et al (2020), we distinguish between large and small countries to get information how the results depend on the country grouping.…”

“…Up to now, only the cumulated national net issues are taken as a proxy of cash demand (see for the euro area Bartzsch, et al, 2013;Rua, 2018;Seitz, et al, 2020; for the US, Judson & Porter, 2001, ch 6.4) or, the euro area as a whole is investigated (see Fischer, et al, 2004;Rua, 2019). Second, and following Seitz, et al (2020), we distinguish between large and small countries to get information how the results depend on the country grouping. Third, we use estimates of the shadow economy which do not rely on the currency demand approach (see Medina & Schneider, 2018, ch 3).…”