The paperSee Banknote paper. More Payment Innovations, the Shadow Economy and Cash Demand of Households in Euro Area Countries uses a cointegration framework to understand the drivers of cashMoney in physical form such as banknotes and coins. More demand in the euro-area. Besides the traditional determinants of cash demand like transactions balances and opportunity costs, the authors concentrate on cashless payments media as substitutes to cash payments and the role of the shadow economy. Moreover, they also take due account of country-specific repercussions of the financial and economic crisis of 2008/09, time series properties and distinguish between small and large countries.

Drivers of Cash Demand

The report concludes that cash holdings of euro-area households are driven by:

• Transactions demand
• The availability of alternative cashless payments media, i.e. paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More innovations
• The shadow economy
• Ways to access cash
• Crisis periods
• Time trends as a catch-all variable for non-modelled motives for holding cash.

This implies that the drivers of cash demand are the same, no matter big or small countries, northern or southern countries, countries with an affinity to use cash or those in which consumers predominantly pay cashless or in which there is a policy of restricting the use of cash.

The authors conclude “To ensure a smooth functioning of the cash cycleRepresents the various stages of the lifecycle of cash, from issuance by the central bank, circulation in the economy, to destruction by the central bank. More and the retail payments system, it is important for central banks as well as the commercial banking system to be aware of these developments. This is especially true against the background that the biggest share of cash holdings within the euroThe name of the European single currency adopted by the European Council at the meeting held in Madrid on 15-16 December 1995. See ECU. More area originates from private households.”

The advance of cashless payment methods incentivise people to substitute cash. Consequently, the widespread use of new payments innovations like contactless and mobile payments will further reduce cash holdings (see Brown et al 2020).

Crises Increase the Demand for Cash

It is also common wisdom that every crisis up to now has increased the demand for cash. In this respect, the Covid-19 crisis is special. On the one hand, we saw a decline in transactional demand and a rise of card, especially contactless, payments. On the other side, there was an increase in currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More in circulation worldwide, even in Scandinavian countries (e.g., Goodhart & Ashworth, 2020; Chen et al, 2020). The euro area, for example, observed the strongest weekly increase in cash demand ever since its inception, exceeding the previous record in the wake of Lehman crisis in 2008 (Panetta, 2020).

Abolishing Cash would not Curb the Shadow Economy

The paper finds that the size of the shadow economy has a strong positive impact on cash demand in the euro area. However, the shadow economy is a construct which, by definition, is hard to capture and to estimate. All in all, it seems that even if cash is used for payments of shadow economic activities, it is probably used to a smaller extent in the context of shadow economic activities than is often suspected and that abolishing or limiting cash would not be as effective as desired in curbing these activities (Mai, 2016; Schneider & Linsbauer, 2016).

All other motives for holding cash were summarized using a (deterministic) trend variable which exerted a positive influence on cash demand in nearly all countries in the sample. Future research should focus on trying to find variables that capture these motives. This would enable to analyze and interpret the cash developments even more precisely and shed more light on the still not so “bright box” of cash demand.

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• Payment Innovations, the Shadow Economy and Cash Demand of Households in Euro Area Countries