Abstract
Demand for cash is generally known to be influenced by several factors—including transaction motive used for payment, opportunity cost, precautionary motive, and other motives (such as aging and demand from abroad). In recent years, cashless payment methods have increasingly become prevalent in the world through various conventional tools and innovative convenient financial services using mobile phones and smart phones. Nevertheless, cash in circulation has been rising in many economies, especially after the global financial crisis. This paper seeks to examine factors affecting cash in circulation for 22 economies for the period 2000–2018. It also investigated the movements of banknotes in circulation differentiated by denomination for seven economies whose data were available. The empirical analysis of this paper found that the opportunity cost proxied by the central bank policy rates and age-related variable were the two most important robust determinants for cash demand. Namely, cash demand tends to grow with a decline in the policy rates and with an advancement of aging.
Highlights
Cash is a useful instrument for payment of goods and services and other transactions
Cash demand of the public is generally influenced by (1) transaction motive used for payment, (2) opportunity cost, (3) precautionary motive, and (4) other motives
As proxy for opportunity cost, 10-year yield (10-YEAR) was less robust than INTEREST as a regressor in the pooled-data models
Summary
Cash is a useful instrument for payment of goods and services and other transactions. It is the safest, liquid payment and financial instruments for the public. Cash demand of the public is generally influenced by (1) transaction motive used for payment, (2) opportunity cost, (3) precautionary motive, and (4) other motives. The rising trend is prevalent, even in advanced economies notwithstanding that the public normally has had full access to bank accounts and credit cards for long periods of time and other cashless and contactless payment tools in recent years. Some emerging economies, such as China have experienced a decline in the ratio of cash in circulation to nominal GDP This may indicate that the Chinese have gained access to the bank accounts and/or other non-bank cashless payment and financial services.
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