Understanding the shadow economy in Central and Eastern Europe using the currency-demand approach: a regional perspective

This paper uses the currency-demand approach to study regional disparities in the shadow economy across Central and Eastern Europe over the period 2001–21. The empirical strategy is deliberately sequential. First, we estimate a national cash-demand benchmark using a pooled mean group autoregressive distributed lag model (PMG-ARDL). Second, we convert excess cash into shadow gross domestic product (GDP) under three alternative money–velocity assumptions. Third, we allocate the national baseline estimate across NUTS-2 regions through a structural rule that preserves national totals exactly. The results show robust cross-country differences, sizeable within-country heterogeneity and relatively stable spatial rankings across alternative conversion scenarios.