Macroeconomic Determinants and Underground Economy in Nigeria: A Currency Demand Approach

By: Roseline Chinasa Agbaraevoh, Larry Ogochukwu Achara, Chosen Ndukwe-Tochi

Pages: 230–246, Volume: 2, Number: 2

Published by: AEFUNAI Journal of Economics, Finance and Development Studies, Alex Ekwueme Federal University, Ndufu-Alike, 9/1/2025, 2025

ISSN (Electronic): 2536-6742

DOI: 10.48028/iiprds/aefunaijefds.v2.i2.12

Macroeconomic Determinants and Underground Economy in Nigeria: A Currency Demand Approach

Abstract:

This study investigates the macroeconomic determinants of the underground economy in Nigeria using the Currency Demand Approach (CDA). Specifically, it examines the effects of the Consumer Price Index (CPI), unemployment rate, tax burden, and inEation rate on currency demand as a proxy for underground economic activity over the period 2000–2023. Employing multiple regression analysis, the findings reveal that CPI and unemployment have a statistically significant and positive inEuence on currency demand, suggesting that rising prices and joblessness push economic agents toward informal transactions. On the other hand, tax burden and inEation, though theoretically linked to informality, were found to be statistically insignificant in this context. The joint significance test confirmed that the selected macroeconomic variables collectively explain variations in the underground economy. These results support the Institutional Theory and Dual Sector Model, which posit that weak institutions and labor market failures incentivize informal economic activity. The study concludes that Nigeria’s underground economy is driven primarily by inEationary pressures and unemployment rather than tax rates. Accordingly, the paper recommends policy interventions focused on price stabilization, employment creation, tax system reforms, and the digitization of financial transactions to reduce informality and enhance national revenue mobilization.

Keywords: Underground economy, Informal sector, Tax evasion, Macroeconomic determinants, Nigeria