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Modeling the Share of Cash Payments in the Economy: An Application to France

  • Yassine Bouhdaoui

    (Economics and Social Sciences Department, Telecom ParisTech)

  • David Bounie

    (Economics and Social Sciences Department, Telecom ParisTech)

Modeling the demand for cash and deposits is a primary concern for central banks. Within a wide range of academic contributions, payment choice models based on transaction sizes (TS models) have been promoted. However, TS models induce strong predictions about the use of payment instruments. In particular, all equal-sized transactions are supposed to be paid with the same payment instrument. We propose a simple alternative model based on cash holding (CH model) that allows equal-sized transactions to be paid for in cash or with other payment instruments. Using micro-level payment data from two representative samples of the French population in 2005 and 2011, we test how well each model replicates the observed shares of cash payments in the French economy for each size of transaction. We find that the CH model outperforms TS models, as it better predicts the observed shares of cash payments with notably less demanding information on individuals.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 8 (2012)
Issue (Month): 4 (December)
Pages: 175-195

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Handle: RePEc:ijc:ijcjou:y:2012:q:4:a:5
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  1. Francesco Lippi & Alessandro Secchi, 2008. "Technological change and the households' demand for currency," EIEF Working Papers Series 0801, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
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  8. Anthony M. Santomero & John J. Seater, 1995. "Alternative Monies and the Demand for Media of Exchange," Center for Financial Institutions Working Papers 96-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. C.K. Folkertsma & G.E. Hebbink, 1998. "Cash management and choice of payment media: a critical survey of the theory," WO Research Memoranda (discontinued) 532, Netherlands Central Bank, Research Department.
  10. Whitesell, William C, 1989. "The Demand for Currency versus Debitable Accounts: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 246-57, May.
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