Pecunia olet.

Posted by andreagiacobino on October 27, 2022 in Uncategorized | Leave a comment

Banca d’Italia

Questioni di Economia e Finanza (Occasional Papers) – n. 649 ottobre 2021

PECUNIA OLET.
CASH USAGE AND THE UNDERGROUND ECONOMY

by Michele Giammatteo, Stefano Iezzi and Roberta Zizza

Abstract

This paper explores the role of cash usage in feeding the underground economy by using a unique dataset that combines, at province level, official estimates of Italian firms’ underreporting with data on cash transactions drawn from the aggregate anti-money laundering reports filed to the Italian Financial Intelligence Unit (UIF) by banks. In order to derive causal evidence, we apply two different econometric strategies: an instrumental variable approach and a difference-in-difference approach, which exploits the change in the maximum threshold for cash transactions introduced in 2016, thereby providing a measure of the effect of such policy on tax evasion. We find that an increase in cash usage translates, other things being equal, into a higher level of underreporting by firms, and that raising the cash threshold in 2016 – a measure motivated by the objective of boosting spending – had the side effect of leading to a larger underground economy.