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Cash does not fuel the shadow economy

Categories : Cash generates security, Cash is trust
April 23, 2019
Tags : Cash, Demand, Economy
The Deutsche Bundesbank reports that there is no evidence that restricting cash usage is effective in limiting the illegal use of cash
Guillaume Lepecq

This post is also available in: Spanish

Cash is often suspected of fueling the shadow economy, facilitating money laundering and financing terrorism.  And there have been many calls to restrict its use, including Larry Summers, Karl Rogoff or Peter Sands. Nonetheless, little research-based evidence is available to measure cash demand resulting from the shadow economy. The Deutsche Bundesbank fills the gap as a new paper explores the use of cash for illegal activities.

At the end of 2018, of the €1,230 billion in circulation in the euro-zone, €690 billion or 56% were issued in Germany. It is estimated that over two-thirds of this amount or €457 billion is held abroad; 20% is used for domestic store of value purposes and 10% is used for day-to-day transactions.

Various studies estimate that the size of the shadow economy ranges between 2.4% and 16.6% of (GDP) or between approximately €80 billion and €550 billion. A widely-held opinion in the literature is that macroeconomic approaches overestimate the size of the shadow economy as analyses do not take into account foreign demand or the function of cash as a legal store of value.

However, empirical analyses based on the value of cash in circulation or on the demand for high-denomination notes do not warrant direct conclusions on the illegal use of cash as they do not take into consideration the store of value demand. Another approach consists in using econometric analysis using proxy variables for the shadow economy – such as the tax and social contributions ratio or the number of drug-related offenses – the results are largely inconclusive and depend on the assumptions made.

The report also concludes that there is no evidence that measures to restrict cash usage – such as the elimination of high-denomination notes and the introductions of caps on payments made in cash – are effective in limiting the illegal use of cash.

Download the full March Report by the Deutsche Bundesbank here: Cash demand in the shadow economy

This post is also available in: Spanish