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Understanding the Cash Demand Puzzle

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  • Janet Hua Jiang
  • Enchuan Shao

Abstract

We develop a model to explain a puzzling trend in cash demand in recent years: the value of bank notes in circulation as a percentage of GDP has remained stable despite decreasing cash usage at points of sale owing to competition from alternative means of payment such as credit cards. The main feature of the model is that cash circulates between economic activities where the substitutability between cash and other means of payment is uneven. Our model predicts that, once credit expands beyond a certain level, agents adjust their cash management practices in response to further credit expansions, causing the velocity of cash to slow down, so that the demand for cash can remain flat despite diminishing cash transactions.

Suggested Citation

  • Janet Hua Jiang & Enchuan Shao, 2014. "Understanding the Cash Demand Puzzle," Staff Working Papers 14-22, Bank of Canada.
    • Handle: RePEc:bca:bocawp:14-22
    DOI: 10.34989/swp-2014-22
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Geoffrey R. Dunbar, 2019. "Demographics and the demand for currency," Empirical Economics, Springer, vol. 57(4), pages 1375-1409, October.
    3. Hiroshi FUJIKI & Kiyotaka Nakashima, 2019. "Cash Usage Trends in Japan: Evidence Using Aggregate and Household Survey Data," Working Papers e131, Tokyo Center for Economic Research.
    4. Jobst, Clemens & Stix, Helmut, 2017. "Doomed to Disappear? The Surprising Return of Cash Across Time and Across Countries," CEPR Discussion Papers 12327, C.E.P.R. Discussion Papers.

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    Keywords

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    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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