Indirect Evidence of the Effect of Informal Economy in the Behavior of the Foreign Currency’s Prices: A Case Study

Abstract

The effect of informal economy on the behavior of exchange rate is complex and difficult to evaluate in common economic conditions. But if informal sector is sizeable and a certain foreign currency is used for transactions therein without being converted, the supply and the demand for this currency, the velocity of the money circulation, and several other variables would be impacted, implicating a measurable response in the corresponding FX rates’ behavior, while the other currencies’ prices will be less affected. Consequently, distinguishable dissimilarities regarding dynamics and statistical features are expected for the exchange rates of the currencies traded in the country. By evidencing and analyzing them, we can proceed with a backward analysis to identify the hidden relationships between informal economy and exchange rates. As a case study we analyzed the FX rates of main currencies traded in Albania, considering that specifically the Euro is used at a non-neglected volume as national currency substitute in the informal sector. Recognizing the complexity of the relationship under investigation, we have employed an interdisciplinary approach by incorporating econometrics and econophysics approaches. After examining the multifractal features of each FX series, the non-stationarity measure for distributions of the corresponding rate of returns, and the significance of self-organizing regimes on FX time series, we noticed that the price of the EU currency behaves distinguishably different. We described the specific features observed for the Euro-ALL exchange rates as an indication of their response to the informal economy and partial usage of the Euro in the role of national currency in this sector. Those findings are used also for opinionizing regarding formalization issues and scenarios of replacement of national currency by the Euro. Acknowledging that informality is undoubtedly harmful for the economy, this work is limited to providing an alternative explanation of specific FX rates comportment observed in the country, and to offer a descriptive analysis for similar systems.