Journal of Business & Economic Policy

Cash in Circulation and the Shadow Economy: An Empirical Investigation for Euro Area Countries and Beyond
Franz Seitz, Hans-Eggert Reimers, Friedrich Schneider

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 (Australia, Canada, Japan, Norway, Sweden, Switzerland, UK, US). For these countries, we are not able to establish an economically meaningful and statistically significant cash demand equation including the shadow economy.

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