The Relationship Between the Informal Economy and the Velocity of Money in Iran

Document Type : Research Article

Author

Assistant Professor, Department of Accounting, Faculty of Humanities, Bozorgmehr University of Qaenat, Qaen, Iran.

Abstract

The informal economy affects various economic sector, including the monetary sector. The velocity of money is one of the important monetary variables that have important effects on the results of monetary policies. In this study, the effect of the size of the informal economy on the velocity of money in Iran has been investigated using annual data during the period of 1990-2018. Using the Auto-Regressive Distributed Lag (ARDL) model, the relationship between the variables has been investigated. The results of the research model show that the larger the size of the informal economy, the faster the velocity of money, which indicates the positive effect of the money demand channel in the shadow economy on the velocity of money. Additionally, other explanatory variables including inflation rate, economic growth, and bank lending also show a positive effect on the velocity of money. Moreover, the results show that changes in the informal economy can lead to asymmetric changes in the velocity of money. Therefore, the activities of the informal economy affect the velocity of money, the money market, and the performance of monetary policies in Iran. It is crucial for policy makers to consider the role of informal and shadow economy activities in assessing the consequences of economic policies. Based on the research fundings, measures including inflation control, limiting informal economy activities, and increasing bank credits should be taken into account in order to control the velocity of money. Given the positive relationship between the velocity of money and the informal economy, it can be said that any policy that limits the shadow economy reduces the velocity of money and affects the effectiveness of monetary policy.

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Main Subjects

References

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Journal of Applied Economics Studies in Iran
Volume 12, Issue 47
October 2023
Pages 73-99

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