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Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma

Author

Listed:
  • Feige, Edgar L.

Abstract

This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation and hence the currency velocity (turnovers per year) of each denomination. The velocity of currency times the stock of currency produces estimates of the annual volume of cash payments. Since the volume of check payments (debits to checkable accounts) is regularly recorded, our estimates of cash payments can be used to estimate the total volume of transactions (MV) from the payment side of Fisher’s equation of exchange. The paper goes on to examine the “currency enigma” from the perspective of both “missing currency” and “missing payments”. The estimated volume of cash payments is so high when compared to personal consumption expenditures, that one is led to the conclusion that a large fraction of the US currency supply is held abroad, and that there is a sizable underground (unreported and perhaps unrecorded) economy in the United States.

Suggested Citation

  • Feige, Edgar L., 1989. "Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma," MPRA Paper 13807, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13807
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    File URL: https://mpra.ub.uni-muenchen.de/13807/1/MPRA_paper_13807.pdf
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    References listed on IDEAS

    as
    1. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309.
    2. Robert B. Avery & Gregory E. Elliehausen & Arthur B. Kennickell & Paul A. Spindt, 1986. "The use of cash and transaction accounts by American families," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 87-108.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Feige, Edgar L., 2009. "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"," MPRA Paper 19564, University Library of Munich, Germany.
    2. Feige, Edgar L., 2012. "The myth of the “cashless society”: How much of America’s currency is overseas?," MPRA Paper 42169, University Library of Munich, Germany.
    3. Alexandra Rush, 2015. "The Life of Australian Banknotes," RBA Bulletin, Reserve Bank of Australia, pages 55-62, September.

    More about this item

    Keywords

    Currency; Currency Velocity; Cash payments; transactions; Underground economy; Currency turnover; Counterfeit currency; Currency enigma;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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