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Modelling currency demand: the case of the euro

Author

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  • António Rua

    (Banco de Portugal
    Nova School of Business and Economics)

Abstract

Liquidity management is a key mission of a central bank. In particular, the adequate provision of banknotes requires the understanding of what drives currency demand. The challenge is even bigger in the case of the European monetary union where the euro continues to develop into a well-established currency outside borders. In this respect, a novel indicator is proposed to reflect foreign demand developments. Moreover, besides the usual set of determinants, variables covering financial and economic policy uncertainty are also taken into account. The full denominational breakdown of banknotes is considered so as to unveil the heterogeneous role played by the several drivers. It is found that external demand is relevant for large denominations and uncertainty also matters for cash demand. Furthermore, the recent ECB announcement of the end of issuance of the largest denomination banknote led to a reduction in the overall demand for euro banknotes.

Suggested Citation

  • António Rua, 2021. "Modelling currency demand: the case of the euro," Empirical Economics, Springer, vol. 61(4), pages 1865-1881, October.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:4:d:10.1007_s00181-020-01939-8
    DOI: 10.1007/s00181-020-01939-8
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    References listed on IDEAS

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    Cited by:

    1. Rösl, Gerhard & Seitz, Franz, 2023. "Uncertainty, politics, and crises: The case for cash," IMFS Working Paper Series 186, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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    More about this item

    Keywords

    Banknotes demand; Euro; Denominational breakdown; DSUR; SUR ECM;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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