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The Cash Paradox

Author

Listed:
  • Janet Hua Jiang

    (Bank of Canada)

  • Enchuan Shao

    (University of Saskatchewan)

Abstract

In many industrialized countries, cash usage at points of sale has been decreasing owing to competition from alternative means of payment such as credit cards. At the same time, cash demand, measured as currency in circulation over GDP, fell only in earlier years but has remained surprisingly robust in the past two to three decades. This phenomenon, termed the "cash paradox," poses a challenge to standard monetary models. We introduce two new features into the standard cash-credit model: the substitutability between cash and credit (as a stand-in for alternative means of payments) is uneven across different economic activities, and some agents actively manage cash flows across these activities. Calibration exercises show that the cash-flow channel is important for quantitatively capturing the diverging trends in cash usage and demand. There is also some empirical support for our model's prediction on cash velocity in the retail sector. (Copyright: Elsevier)

Suggested Citation

  • Janet Hua Jiang & Enchuan Shao, 2020. "The Cash Paradox," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 177-197, April.
    • Handle: RePEc:red:issued:18-268
    DOI: 10.1016/j.red.2019.09.003
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    1. Edoardo Rainone, 2022. "Currency demand at negative policy rates," Temi di discussione (Economic working papers) 1359, Bank of Italy, Economic Research and International Relations Area.
    2. Jacek Pietrucha & Grzegorz Maciejewski, 2020. "Precautionary Demand for Cash and Perceived Risk of Electronic Payments," Sustainability, MDPI, vol. 12(19), pages 1-25, September.
    3. Liang Wang & Randall Wright & Lucy Qian Liu, 2020. "Sticky Prices And Costly Credit," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 37-70, February.
    4. Lalouette, Laure & Zamora-Pérez, Alejandro & Rusu, Codruta & Bartzsch, Nikolaus & Politronacci, Emmanuelle & Delmas, Martial & Rua, António & Brandi, Marco & Naksi, Martti, 2021. "Foreign demand for euro banknotes," Occasional Paper Series 253, European Central Bank.

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    More about this item

    Keywords

    Demand for Cash; Credit; Velocity; Cash Management;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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