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

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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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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  1. 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.
  2. 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.
  3. 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.
  4. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2000. "The Role of Social Capital In Financial Development," CEPR Discussion Papers 2383, C.E.P.R. Discussion Papers.
  5. Tom Coupe, 2011. "Mattresses versus Banks - The Effect of Trust on Portfolio Composition," Discussion Papers 40, Kyiv School of Economics.
  6. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2005. "Trusting the Stock Market," NBER Working Papers 11648, National Bureau of Economic Research, Inc.
  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. Lusardi, Annamaria & Mitchell, Olivia S., 2008. "Planning and financial literacy: How do women fare?," CFS Working Paper Series 2008/03, Center for Financial Studies (CFS).
  9. 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.
  10. 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).
  11. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
  12. Beck, Thorsten & Brown, Martin, 2011. "Which households use banks? Evidence from the transition economies," Working Paper Series 1295, European Central Bank.
  13. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July.
  14. 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).
  15. 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.
  16. Craig, Ben & Waller, C.J.Christopher J., 2004. "Dollarization and currency exchange," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 671-689, May.
  17. Feige,E.L., 2003. "The dynamics of currency substitution, asset substitution and de facto dollarization and euroization in transition countries," Working papers 3, Wisconsin Madison - Social Systems.
  18. 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, pages 1-30.
  19. 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.
  20. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
  21. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  22. 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.
  23. Djankov, Simeon & Miranda, Pedro & Seira, Enrique & Sharma, Siddharth, 2008. "Who are the unbanked ?," Policy Research Working Paper Series 4647, The World Bank.
  24. 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.
  25. 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, pages 1-11.
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