Using Cash to Monitor Liquidity: Implications for Payments, Currency Demand, and Withdrawal Behavior

Abstract

This paper provides one explanation why cash is still used for transactions despite a broad diffusion of noncash payment instruments. In particular, we argue that a distinctive feature of cash—a glance into one's pocket gives a signal of the remaining budget and past expenses—provides utility to some consumers. Using payment survey data, we show that consumers who need to keep control over their remaining liquidity and who have elevated costs of information processing conduct a larger percentage of payments using cash, withdraw less often, and hold larger cash balances than other consumers.