A new paper published by the Banque de France and authored by Franz Seitz, Lucas Devigne, and Raymond De Pastor analyzes the demand motives of the outstanding amount of 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 banknotes issued by the Banque de France. Since the introduction of the euro, these cumulated net issues have steadily increased over time from €30 billion in 2002 to nearly €185 billion at the end of 2021. This is not only true in absolute terms but also relative to GDP (see Graph 1). Therefore, domestic demand for transaction balances cannot be the only driver.
Graph 1. France: CashMoney in physical form such as banknotes and coins. More to GDP Ratio, 2002-2020 (in %)
The demand for banknotes can be split into domestic transactions, store-of-value and foreign demand. Although the central bank knows precisely the amount of cash issued, there is a lack of information on who holds it, for what motives, and where it circulates. Moreover, the exercise is even more complicated within the euro area as euro banknotes issued in France may migrate to other euro countries (and vice versa) without any obstacle. In their analysis, the authors concentrate on the situation from 2002 until the end of 2019 to not distort the results of the coronavirus pandemic, which had enormous repercussions on cash demand worldwide.
As a first step, the authors estimate cash demand equations for different denominational groups within a cointegration framework to get information on the prevalence of other motives for holding cash. The results confirm that non-transactional, as well as transactional reasons for having cash, are present in the case of France.
To estimate the corresponding shares, indirect methods were applied, using different characteristics of domestic transaction balances compared to cash balances held for other purposes (at home and abroad). The authors predominantly concentrate on the so-called seasonal method, applied to French cumulated net issues of banknotes. The seasonal methods aim to filter out information about banknotes in circulation not used for transaction balances within France from the “seasonal pattern of banknotes” characteristics.
In 2019, only around 15 % of the cumulated net issues (representing €145 billion) were used for domestic transactions (see Graph 2 below). More than half of the net cumulated balances were held outside France, either in other euro area countries (i.e., France is a net exporter of banknotes within the euro area) or, mostly, outside the euro area. Finally, the authors estimate that around 25 % of the cumulated net issues were used for domestic hoardingThe term refers to the use of cash as a store of value. However, the term has a negative connotation of concealment, and is often used in the context of the war on cash. See Precautionary Holdings. More purposes.
Graph 2. France: Different Motives for Holding Cash, 2019
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