No. 649 - Pecunia olet. Cash usage and the underground economy

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by Michele Giammatteo, Stefano Iezzi and Roberta ZizzaOctober 2021

This study provides empirical evidence, which is scarce in the literature, of the causal link between the use of cash and the size of the underground economy by applying two different econometric strategies. The data used, referring to the Italian provinces in the period 2015-17, come from various sources, including the aggregate anti-money laundering reports (SARA) filed to the UIF by banks and Istat estimates of the shadow economy (underreporting of turnover by companies).

An increase in the use of cash translates, other things being equal, into an increase in the share of economy that is undeclared. Furthermore, raising the threshold for the use of cash from €1,000 to €3,000, as was done in Italy in 2016 to boost spending, had the side effect of leading to a larger underground economy. Although the methodologies used have some limitations, the results support the idea that constraining the use of cash may be effective in countering tax evasion.

Published in 2022 in: Journal of Economic Behavior & Organization, v. 204, pp. 107-127.

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