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January 1980

The Demand for Currency: Is the Underground Economy Undermining Monetary Policy

by Norman N. Bowsher

Because of the sustained growth of currency outstanding relative to demand deposits, questions have arisen about what purposes the currency serves. More specifically, does this currency support a huge and growing amount of unreported economic activity? Moreover, since currency is one major use for the monetary base, are there other monetary policy implications of the alleged change in demand for currency? This article explores the answers to these questions.