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Currency Demand during the Global Financial Crisis: Evidence from Australia

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Author Info

  • Tom Cusbert

    (Reserve Bank of Australia)

  • Thomas Rohling

    (Reserve Bank of Australia)

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    Abstract

    Australian financial institutions remained healthy throughout the global financial crisis and their deposits were guaranteed by the Federal Government. Nevertheless, demand for currency increased abnormally quickly in late 2008, resulting in an additional $5 billion (or 12 per cent) of Australian banknotes on issue by the end of that year. The rise in currency demand began in mid October 2008, around four weeks after the collapse of Lehman Brothers and concurrently with policy responses of the Reserve Bank of Australia (RBA) and the Federal Government. The surge in currency demand did not have any destabilising effect on the banking system – indeed bank deposits also rose during the period. However, the rise in currency demand did raise some issues for the RBA's banknote distribution operations. Traditional methods of currency demand suggest a role for interest rate reductions and the Federal Government stimulus payments to households in explaining the increase in currency holdings. We estimate that these factors can only account for around 20 per cent of the observed increase in currency holdings. The remainder of the rise could be due to an increase in precautionary holdings by people concerned about the liquidity or solvency of financial institutions and by financial institutions as a contingency. This is consistent with the disproportionate rise in demand for high-denomination banknotes at this time.

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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-01.

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    Date of creation: Jan 2013
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    Handle: RePEc:rba:rbardp:rdp2013-01

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    Keywords: currency demand; banknote demand; financial crisis;

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    References

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    1. C. Bjørnland, Hilde, 2003. "A stable demand for money despite financial crisis: The case of Venezuela," Memorandum 12/2003, Oslo University, Department of Economics.
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    Cited by:
    1. Edward Kim & Terence Turton, 2014. "The Next Generation Banknote Project," RBA Bulletin, Reserve Bank of Australia, pages 1-12, March.

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