What explains the growing global demand for cash?

What explains the growing global demand for cash?

In recent years, cashless payment methods have become increasingly prevalent around the world due to the use of various innovative tools and convenient financial services through mobile phones. This trend is contributing to greater efficiency in our economies and financial systems. Nevertheless, a puzzling phenomenon is that the demand for cash has been rising in many countries. This means that growth in the demand for cash reflects factors other than the transaction motive used for payment. These factors might include opportunity cost, precautionary motives, and other motives such as aging and demand from abroad.

In a recently published ADBI study (Shirai and Sugandi 2019), we investigated movements in cash demand by focusing on 11 advanced economics and 11 emerging economies for the period 2000–2018. The value of notes in circulation can be regarded as reflecting cash demand since a central bank normally determines the amount of cash to be issued passively by responding to changes in the demand for cash. The amount of cash in circulation is, thus, beyond the control of a central bank. A central bank issues and circulates cash through the banking system by providing commercial banks with the cash demanded by withdrawing the equivalent amount from their reserve balances with the central bank; these commercial banks then distribute the acquired cash to the public on demand through windows of bank branches and/or automated teller machines (ATMs). Among the factors contributing to cash demand, the transaction motive is generally proxied by nominal gross domestic product (GDP). Therefore, we focus on cash in circulation as a percentage of nominal GDP to trace the movements in cash demand driven by factors other than transaction demand (see Figure).

Figure: Cash in Circulation as a Percentage of Nominal GDP (%)

<img src="https://www.asiapathways-adbi.org/wp-content/uploads/2019/10/Figure-Cash-in-Circulation-as-a-Percentage-of-Nominal-GDP-.jpg" alt="Figure: Cash in Circulation as a Percentage of Nominal GDP (%)" width="600" …continue reading