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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Currency ratios and U.S. underground economic activity
Richard D. Porter
Gretchen C. Weinbach
Abstract

Cagan's classic currency ratio suggests that underground economic activity in the U.S. surged starting in 1994. In contrast, we show that a ratio adjusted to take care of two distorting developments -- retail sweep programs and overseas demand for U.S. currency -- did not surge, and that movements in the adjusted ratio owe primarily to the differential effects of interest rates on currency and checkable deposits. As a result, we are skeptical of monetary-based claims that the underground economy has expanded significantly in recent years and believe that any claims that is has must rely on other evidence.


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Richard D. Porter & Gretchen C. Weinbach, Currency ratios and U.S. underground economic activity, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 1998-41, 1998.
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Keywords: Money ; Informal sector (Economics)
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