Tax Evasion and the Demand for Currency in Norway and Sweden. Is There a Hidden Relationship?

Variables associated with the level of hidden economic activity are examined in terms of their effects on the demand for currency in Norway and Sweden. Aggregate time series of marginal tax rates are compiled for this purpose. No such effects are evident for Norway, while in the case of Sweden the demand for currency was found to be significantly related to marginal tax rates. These estimates are then used as a basis for deriving an estimate of the size of the hidden economy in Sweden. An analysis of the assumptions underlying this procedure shows that the uncertainty involved in applying the currency approach to measuring the size of the hidden economy is so great as to make it hazardous to rely on such estimates.