Is a Growing Unobserved Sector Undermining Monetary Policy in the Federal Republic of Germany?

Empirical evidence indicates that the shadow economy in West-Germany is growing more rapidly than the official economy. Therefore the observed deceleration of potential output, an important determinant of the monetary growth rate of the Bundesbank, is overestimated. However, despite the growing unobserved sector, the hypothesis of a stable, traditional demand for money function could not be rejected. As to the management of the money supply process, there is no theoretical or empirical evidence that it is aggravated by a more intensive use of cash in the underground sector.