Currency demand modeling in estimating the underground economy in Turkey: An error correction framework

Abstract

Underground economic activities are one of the most important problems, especially in developing countries. Since it's size is not known exactly, the determination and implementation of macroeconomic and social policies become very critical. The measurement of the underground economy has been the subject of intense debate in the literature. Some authors have used the direct method to assess the underground economy while others have attempted an indirect method, known as the non-monetary approach and monetary approach, respectively. A commonly used approach to measure the size of the underground economy, known as the monetary method, is based on econometric estimates of the demand for currency. The currency demand approach provides some insight into the size and development of the underground economy in Turkey. This study follows the monetary approach based on a monetary indicator and in particular the amount of currency in circulation. It differs however from previous studies by introducing technological variables related to banking activities to demand for currency function and the use of quarterly data instead of end of year figures for the 2002-2010 period