Synonyms

Currency demand

Definition

Cash demand is a demand for the legacy currency of a country which is influenced by residents and nonresidents of a country.

The Meaning of Cash Demand

Cash demand is the demand for a currency, mostly banknotes. As coins constitute only a relatively small part of total cash demand, they are usually neglected in the analyses of overall cash demand. The demand for the legacy currency is, in general, influenced by the arguments which also drive macroeconomic money demand in a country. However, cash demand is specific first, because the amount demanded is normally fully accommodated by central banks, so demand growth or changes in the composition of banknotes according to their denomination are provided without macroeconomic or budget constraint consequences (Bartzsch et al. 2011). Second, cash demand underlies special microeconomic considerations which somehow balance in the analysis of total money demand, i.e., demand for cash and deposits. Third, cash demand for currencies of different legacies cannot be assumed to be identical. There are rather decisive distinctions between the demand motives for separate currencies (Fischer et al. 2004).

Cash Demand as a Component of Money Demand

Cash demand is a part of overall money demand, for instance, for M1 or M3. The analysis of total money demand should always take into account that it is not a simple sum of the demand for cash and for deposits since there are often substitution processes going on between the components. Moreover, money demand is confronted with macroeconomic money supply considerations and goals of the monetary policies which are not similarly influential for cash demand alone.

Main Influences on Cash Demand

Cash demand is mainly caused by the transaction motive. Households and businesses need cash in order to accomplish everyday consumption goods transactions. This medium-of-exchange function of cash goes together with consumption expenditures of households within a country. But not all private consumption expenditures are paid in cash. A rising amount of cash transactions is substituted by card payments or other technical possibilities to directly withdraw money from personal deposits. In addition, cash is not used unanimously with all banknote denominations of a currency. There is evidence throughout all currencies that people concentrate on small- and medium-size denominations (Deutsche Bundesbank 2009). Thus, large banknotes are often not demanded for the payment of everyday consumption expenditures, but they serve the second demand motive as store of value. Cash as a store of value has opportunity costs. In quite a lot of countries, people rely on cash even if they could earn interest revenues and even if the opportunity cost is increased by inflationary developments of a currency. But, the use of cash as a store of value eases its future use in payments without relevant transactions costs. Additional national influences on cash demand are exerted by the fact that cash provides anonymity in the transactions which are executed with the help of banknotes. For some observers this peculiarity is decisive for the use of cash in the non-reported or illegal economy. Cash, at least some banknote denominations of a group of economies whose currencies are assumed to be more stable internally and more stable relative to other countries, does not only serve as a store of value within the countries themselves but also as a reliable store of value for people in other countries whose currencies are at the risk of inflation or devaluation. Therefore, cash demand for selected currencies is an international demand. This international demand is not only based on the function of international store of value but, to a certain extent, can also be related to the function of medium of exchange within the respective foreign countries (Deutsche Bundesbank 2012). The use of a currency beyond the national borders is a common phenomenon of the US Dollar, the Euro, and the former DM (European Central Bank 2011).

The Future of Cash Demand

During the last decades, cash is subdued to rising competitive assaults by new electronic developments which tend to reduce cash payments, even for small transaction values, which is paramount to say that cash will lose its outstanding role as medium of exchange and as store of value. Changing payment habits may lead to a “cashless” society and in the end to a complete breakdown for cash demand (Lippi and Secchi 2009). Up to now, however, there are no signs of a definite abandonment of cash of the most important currencies. So cash demand will be a continuing phenomenon in the future. This tendency is enhanced by a supply side argument. As long as cash in the form of banknotes can carry a favorite symbol of a state and will contribute to government revenues via seigniorage, there will be an enduring cash provision easing further demand developments.

Cross-References