Working paper

Shadow Economy: What Factors Matter in the French Case?

29 November 2023
Authors : Sanvi Avouyi-Dovi, Lorraine Chouteau, Lucas Devigne, Emmanuelle Politronacci

Working Paper Series no. 930. We build a model based on a structural dynamic approach to assess the Non-Observed Economy (NOE) over the period 1990-2019 in France. Our strategy is focused on a systematic scan of the potential causes of shadow economy. We show that the discrepancy between electricity consumption and real GDP growth rates is the main driver of the NOE. However, factors, such as drug offences and net shipments of banknotes also have significant effects on hidden activities even though their effects do not seem to be as strong. The NOE remains non-negligible in France, but its ratio, relative to the GDP, has decreased considerably in the 2000s. Finally, we observe strong links between the NOE index and the cash demand indicators. Thus, concordance tests show a noticeable synchronization between the NOE indexes (global and legal components) and the net issuance of banknotes, especially the total net issuance and the net issuance of the €50 and €200 denominations. Furthermore, the NOE indexes and GDP as well as self-employment are synchronized. We also observe positive correlations between the cyclical components of the total net issuance of banknotes and the estimated shadow economy indexes. Finally, there are some bi-directional causal relationships between the NOE indexes and the aggregate banknote demand. However, there is only a unidirectional causality between these indexes and the demand for Small denominations (€5, €10, €20).

Image Working paper 930
The Benchmark Shadow Economy Index and its Legal and Illegal Components

The paper examine some solutions to the problem of the measurement of the Shadow Economy (or NOE) in the case of the French economy. The authors employ a structural dynamic approach to assess the shadow economy over the period 1990-2019 on a quarterly basis. 

We combine the MIMIC model with a Kalman filter to build an index of the NOE activities in France. The empirical strategy is backed by a systematic scan of the potential legal as well as illegal causes of the NOE (see Figure). 

Despite its presence, the NOE’s relative size compared to the overall GDP has decreased notably in France during the 2000s. The study finds that the primary driver of the shadow economy in France is the discrepancy between electricity consumption and real GDP growth rates even though the influence of its illegal components, such as drug offences or net shipments of banknotes also have, to a lesser extent, significant effects on shadow activities. 

Finally, the paper shows the existence of strong links between the shadow economy index and cash demand indicators. Thus, concordance tests show a noticeable synchronization between shadow economy indexes (global and legal components) and the net issuance of banknotes, especially the total net issuance and the net issuance of the €50 and €200 denominations. Furthermore, shadow economy indexes and GDP as well as self-employment are synchronized. There are positive correlations between the cyclical components of net banknote issuance and the estimated shadow economy indexes. Above all, there are some bi-directional causal relationships between all shadow economy indexes and aggregate banknote demand. However, regarding the different classes of denominations, there is only a unidirectional causality between these indexes and demand for Small (€5, €10, €20) denominations.