This paper develops a mathematically rigorous econometric framework for estimating the size and spatial distribution of the informal economy in Europe, contributing to the field of advanced mathematical economics and statistical modelling. A modified Currency Demand Approach (CDA) is formalized within a two-way fixed effects panel model with Driscoll–Kraay standard errors, which accounts for cross-sectional dependence and heteroskedasticity in the presence of spatially correlated residuals. The model links monetary aggregates to fiscal, institutional, and structural determinants, while the conversion of excess cash into informal economy size estimates is performed using the theoretically consistent Ahumada correction, which explicitly incorporates the income elasticity of cash demand into the monetary estimation procedure. National estimates are subsequently disaggregated to NUTS-2 regions through a structural weighting procedure grounded in labour market indicators, human capital measures, and sectoral composition indices. The empirical results reveal substantial cross-country and regional heterogeneity: Northern European countries exhibit comparatively low levels of informal economic activity, while higher shares are concentrated in parts of Southern and Eastern Europe. The proposed mathematical framework advances the literature by offering a replicable, econometrically sound methodology that integrates national monetary models with sub-national structural information, enabling a more granular and statistically grounded quantification of informal economic dynamics across Europe.
Geambaşu et al. (2026) studied this question.