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The demand for euro area currencies: past, present and future

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Author Info

  • Fischer, Björn
  • Köhler, Petra
  • Seitz, Franz

Abstract

The present paper analyses currency in circulation in the euro area since the beginning of the 1980s. After a comprehensive literature review on this topic we present some stylised facts on currency holdings in the euro area countries as well as at an aggregate euro area level. The next chapter develops a theoretical model, which extends traditional money demand models to also incorporate arguments for the informal economy and foreign demand for specific currencies. In the empirical sections we first estimate the demand for euro legacy currencies in total and for small and large denominations within a cointegration framework. We find significant differences between the determinants of holdings of small and large denominations as well as overall currency demand. While small-value banknotes are mainly driven by domestic transactions, the demand for large-value banknotes depends on a short-term interest rate, the exchange rate of the euro as a proxy for foreign demand and inflation variability. Large-value banknotes seem to be therefore used to an important extent as a store of value domestically and abroad. As monetary policy is mainly interested in getting information on the demand for currency used for domestic transactions we also try several approaches in this direction. All the methods applied result in rather low levels of transaction balances used within the euro area of around 25% to 35% of total currency. After this we deal with possibly changing cost-benefit-considerations of the use of cash due to the introduction of euro notes and coins. Overall, there seems no evidence so far of a substantial decline of the demand for currency in the euro area. JEL Classification: E41, E52, E58

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0330.

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Date of creation: Apr 2004
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Handle: RePEc:ecb:ecbwps:20040330

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Keywords: cointegration; currency in circulation; purposes of holding currency;

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References

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  1. Alberto Cabrero & Gonzalo Camba-Mendez & Astrid Hirsch & Fernando Nieto, 2002. "Modelling the daily banknotes in circulation in the context of the liquidity management of the European Central Bank," Banco de Espa�a Working Papers 0211, Banco de Espa�a.
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Citations

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Cited by:
  1. Columba, Francesco, 2009. "Narrow money and transaction technology: new disaggregated evidence," MPRA Paper 12689, University Library of Munich, Germany.
  2. Ulrich Thiessen, 2010. "The Shadow Economy in International Comparison: Options for Economic Policy Derived from an OECD Panel Analysis," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 481-509.
  3. Kenneth S. Rogoff, 2014. "Costs and Benefits to Phasing Out Paper Currency," NBER Working Papers 20126, National Bureau of Economic Research, Inc.
  4. Goran Vuksic, 2010. "Unrecorded capital flows and accumulation of foreign assets: the case of Croatia," Financial Theory and Practice, Institute of Public Finance, vol. 34(1), pages 1-23.
  5. repec:hal:wpaper:hal-00435685 is not listed on IDEAS
  6. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department.
  7. Balázs Égert & Doris Ritzberger-Grünwald & Maria Antoinette Silgoner, 2004. "Inflation Differentials in Europe: Past Experience and Future Prospects," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 47–72.
  8. Cronin, David & McGuinness, Anne, 2010. "Retail Payment Practices. How They Have Evolved in Recent Times and Where They Might Be Going," Quarterly Bulletin Articles, Central Bank of Ireland, pages 56-82, April.
  9. Rita Odorán & Balázs Sisak, 2008. "Cash demand of the Hungarian economy – is the shadow economy still running smoothly?," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 3(3), pages 19-25, December.

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