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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page 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

Full paper (747 KB PDF)

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Last update: April 2, 1999