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Why Do People Save in Cash? Distrust, Memories of Banking Crises, Weak Institutions and Dollarization

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Abstract

The paper analyzes why households in transition economies prefer to hold sizeable shares of their assets in cash at home rather than in banks. Using survey data from ten Central, Eastern and Southeastern European countries, I document the relevance of this behavior and show that cash preferences cannot be fully explained by whether people are banked or unbanked. The analysis reveals that a lack of trust in banks, memories of past banking crises and weak tax enforcement are important factors. Moreover, cash preferences are stronger in dollarized economies where a “safe” foreign currency serves as a store of value.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Working-Papers/2012/Working-Paper-178/fullversion/working_paper_178_tcm16-249425.pdf
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Bibliographic Info

Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 178.

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Length: 61
Date of creation: 27 Jul 2012
Date of revision:
Handle: RePEc:onb:oenbwp:178

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Keywords: Cash demand; cash hoarding; household finance; trust in banks; social capital; dollarization;

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References

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  1. Seater, John J., 2008. "The Demand for Currency Substitution," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(35), pages 1-30.
  2. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," CeRP Working Papers 72, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  3. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2005. "Reaching out : access to and use of banking services across countries," Policy Research Working Paper Series 3754, The World Bank.
  4. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2000. "The Role of Social Capital in Financial Development," CRSP working papers 511, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Grosjean, Pauline, 2011. "The institutional legacy of the Ottoman Empire: Islamic rule and financial development in South Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 39(1), pages 1-16, March.
  6. Poloz, Stephen S., 1986. "Currency substitution and the precautionary demand for money," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 115-124, March.
  7. Honohan, Patrick, 2008. "Cross-country variation in household access to financial services," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2493-2500, November.
  8. Sascha O. Becker & Katrin Boeckh & Christa Hainz & Ludger Woessmann, 2011. "The Empire is Dead, Long Live the Empire! Long-Run Persistence of Trust and Corruption in the Bureaucracy," CESifo Working Paper Series 3392, CESifo Group Munich.
  9. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
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  11. Edgar L. Feige, 2003. "The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countrieses," Macroeconomics 0305003, EconWPA.
  12. Claessens, Stijn, 2006. "Access to financial services: a review of the issues and public policy objectives," Journal of Financial Transformation, Capco Institute, vol. 17, pages 16-19.
  13. Sandra Dvorsky & Thomas Scheiber & Helmut Stix, 2009. "The 2008 Fall Wave of the OeNB Euro Survey – A First Glimpse of Households’ Reactions to the Global Financial Crisis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2.
  14. Djankov, Simeon & Miranda, Pedro & Seira, Enrique & Sharma, Siddharth, 2008. "Who are the unbanked ?," Policy Research Working Paper Series 4647, The World Bank.
  15. Akcomak, Semih, 2009. "Bridges in social capital: A review of the definitions and the social capital of social capital researchers," MERIT Working Papers 002, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  16. Thomas Scheiber & Helmut Stix, 2009. "Euroization in Central, Eastern and Southeastern Europe – New Evidence On Its Extent and Some Evidence On Its Causes," Working Papers 159, Oesterreichische Nationalbank (Austrian Central Bank).
  17. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2005. "Trusting the Stock Market," CEPR Discussion Papers 5288, C.E.P.R. Discussion Papers.
  18. Edgar L Feige, 2003. "Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries," Comparative Economic Studies, Palgrave Macmillan, vol. 45(3), pages 358-383, September.
  19. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  20. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  21. Tom Coupe, 2011. "Mattresses versus Banks - The Effect of Trust on Portfolio Composition," Discussion Papers 40, Kyiv School of Economics.
  22. Edgar L. Feige & Vedran Šošiæ & Michael Faulend & Velimir Šonje, 2002. "Unofficial Dollarization in Latin America: Currency Substitution, Network Externalities and Irreversibility," International Finance 0205002, EconWPA.
  23. Poloz, Stephen S., 1984. "The transactions demand for money in a two-currency economy," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 241-250, September.
  24. Shannon Mudd & Neven Valev, 2009. "Once Bitten, Twice Shy: Experiences Of A Banking Crisis And Expectations Of Future Crises," William Davidson Institute Working Papers Series wp969, William Davidson Institute at the University of Michigan.
  25. Craig, Ben & Waller, C.J.Christopher J., 2004. "Dollarization and currency exchange," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 671-689, May.
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Cited by:
  1. Brown, M. & Haas, R. de & Sokolov, V., 2013. "Regional Inflation and Financial Dollarization," Discussion Paper 2013-073, Tilburg University, Center for Economic Research.
  2. Doris Ritzberger-Grünwald & Thomas Scheiber, 2012. "Euro Cash in Central, Eastern and Southeastern Europe," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 41–55.
  3. Kari Takala & Matti Viren, 2012. "Why does a Large Shadow Economy not show up in Administrative Inspections?," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 42(2), pages 257-272, September.
  4. Brown, Martin & De Haas, Ralph & Sokolov, Vladimir, . "Regional Inflation and Financial Dollarization," Working Papers on Finance 1327, University of St. Gallen, School of Finance.
  5. Elisabeth Beckmann & Mariya Hake & Jarmila Urvová, 2013. "Determinants of Households’ Savings in Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3.

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