Finance and Economics Discussion Series (FEDS)
November 1998
Currency Ratios and U.S. Underground Economic Activity
Richard D. Porter and Gretchen C. Weinbach
Abstract:
Cagan's classic currency ratio suggests that underground economic activity in the United States 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 to result primarily from 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 it has must rely on other evidence.
Keywords: Currency ratios, underground economic activity, retail sweep programs, overseas U.S. currency
PDF: Full Paper
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