Shadow Economy Estimation Using Cash Demand Approach: The Case of Serbia

Informalities in the Serbian economy seem to be relatively persistent and widespread, as suggested by some empirical evidence and numerous anecdotal evidence provided by citizens and companies. Nevertheless, the shadow—or informal—economy is a rather complicated phenomenon with a complex set of causes and consequences, implying that there are no universally accepted definitions nor quantification methods for determining the relative size of its impact. This paper takes a pioneering approach using the “monetary method” or the “currency demand approach” for the Serbian economy, based on econometric estimates of the demand for money. In this context, we rely on the well-known currency demand approach, expanding and applying it to the case of Serbia. Against the backdrop of the key research question, we found that the shadow economy in Serbia has decreased to roughly 20% of GDP in late 2021 from roughly 30% in 2005.