"The Cash Comeback: Evidence and Possible Explanations"
People like cash.
Except the Swedes, but they're weird.
And dying out.
Clemens Jobst, Helmut Stix29 November 2017
Many societies in the developed world have been shifting
away from cash towards electronic alternatives. Despite this, there has
been a remarkable increase in currency holdings over the past decade.
This column looks at the evolution of cash holdings over time to shed
light on this apparent contradiction. While circulating currency over
GDP has been declining since WWII, there have been sizable increases in
recent decades which are only partially explained by low interest rates.
If we were to believe technology cheerleaders, cash is about to disappear. It has already almost done so in Sweden (Skingsley 2017) and thanks to both new hardware (mobile phones and near-field communication) and software (internet, instant payment systems), it will disappear everywhere else soon.
Appealing as it might be, however, this story does not match with the empirical evidence. Goodhart and Ashworth (2014) noted a “remarkable” increase in the ratio of currency to GDP in the UK from 13.3% in 2007 to 16.1% in 2014. In the US and the Eurozone, people not only hold sizeable amounts of physical cash – in 2016 per capita holdings were around $4,200 and €3,400, respectively – but, even more puzzling, cash holdings relative to nominal GDP have increased in recent years (Figure 1, left panel).
Figure 1 Currency in circulation over nominal GDP (%)
Attempts to explain this apparent paradox typically consider currency-specific factors. US dollars, euros, and Swiss francs are commonly used and hoarded abroad (Bartzsch et al. 2013, Judson 2017, Assenmacher et al. 2017), so increasing circulation might reflect foreign demand. In the case of sterling, which is not an international currency, Goodhart and Ashworth (2014, 2017) attribute the increasing use of cash after 2007 to a thriving shadow economy.
The increase in cash demand is a widespread phenomenonAs we show in a recent paper, the increase in cash demand is not restricted to a handful of currencies but is a broader phenomenon (Jobst and Stix 2017). We collected data on currency circulation for a sample of economies covering 96% of world GDP from 2001 until 2014. Three stylised facts stand out:...MUCH MORE