Cash does not stimulate the informal economy

Cash does not stimulate the informal economy. The Central Bank of Germany reports that there is no evidence that restricting the use of cash is an effective measure to limit the illegal use of cash. It is often suspected that cash stimulates the informal economy, facilitating money laundering and the financing of terrorism. And many have urged to limit their use, including Larry Summers, Karl Rogoff or Peter Sands. However, there is little evidence based on studies to measure the demand for cash derived from the informal economy. The Central Bank of Germany fills this information gap with a new work that analyzes the use of cash for illegal activities. At the end of 2018, of the 1.23 trillion euros in circulation in the euro zone, 56% or 690 billion were issued in Germany. It is estimated that more than two thirds of this amount, that is, some 457 billion euros, is abroad; 20% is used as a local value reserve and 10% for daily transactions. Several studies estimate that the magnitude of the informal economy ranges between 2.4% and 16.6% of the (GDP) or approximately between 80 billion and 550 billion euros. A generalized opinion in the literature indicates that macroeconomic approaches overestimate the size of the informal economy, since analyzes do not take into account external demand or the function of cash as a legal reserve of value. However, empirical analyzes based on the value of money in circulation or the demand for high-denomination notes do not justify direct conclusions about the illegal use of cash, since they do not take into account the demand for cash as a store of value. . Another approach is to use econometric analyzes with fictitious variables for the informal economy, such as the ratio of taxes and social contributions or the number of crimes related to drug trafficking. The results are not at all conclusive and depend on the assumptions employed. The report also concludes that there is no evidence that measures restricting the use of cash, such as the elimination of large denomination bills and the application of ceilings for cash payments, are effective in limiting the use of cash. for illegal purposes. You can download the full report of the Central Bank of Germany for March here: Cash demand in the shadow economy (Demand for cash in the informal economy)