Cash Usage and the Underground Economy

There is an assumption that cash is a driver of the shadow economy, but this is not proven by empirical evidence. Occasional paper 649 from the Banca d’Italia ¹ used the decision to increase the limit on cash usage from €1,000 to €3,000 in January 2016 in Italy as an opportunity to study what happened to cash and the shadow economy. It found that increasing the cash threshold boosted spending, but it also increased the size of the underground economy.

The size of Italy’s shadow economy, the preference for paying in cash and Italy’s history of limiting cash usage makes it an interesting place to assess the relationship between cash and the shadow economy.

The Italian National Statistics Institute (Istat) estimated that in 2018 11% of the total value added to the economy came from the shadow economy as a result of under reported value or value produced by undeclared work. At the same time the 2019 Study on the Payment Attitudes of Consumers in the Euro Area (SPACE) found that 82% of transactions in Italy were in cash (58% by value) compared with 73% across the whole euro area (48% by value).