Forum libero

Most of the cash is not used in transactions since more than one-half of the value of euro banknotes is in the form of notes with a value of €200 and €500, which are rarely used in daily transactions.




CONCLUSIONS:

Financial innovation was expected to lead to a ‘cashless’ economy, but the opposite has happened. Despite the spread of ATMs, debit cards and, more recently, so-called payment ‘apps’, the amount of currency in circulation has expanded over the last decades. The reasons for this surprising development are not clear. There is little indication that the importance of the underground economy (as a share of all economic activity) has expanded and cash holdings are largest in some countries where one would expect only a small underground economy (e.g. Japan and Germany).
This contribution has focused on one, hitherto neglected, consequence of increasing cash holdings. Currency in circulation is part of the monetary base and appears among the liabilities of the central bank. Care must thus be taken in judging the size of central banks’ balance sheets as an indicator of their policy stance. This seems to be particularly important where a better indicator of the policy stance, namely the amount of excess reserves as a percentage of GDP, suggests that the Federal Reserve has already started a gradual exit.
In the euro area, cash holdings are even more important, relative to GDP, than in the US and have increased even more rapidly. The impact on the balance sheet of the Eurosystem has thus also been important, but gradual. Focusing again on the concept of excess reserves, one finds that the balance sheet expansion of the ECB through its asset purchases has been smaller (as a percent of GDP) than that of the Federal Reserve, although the overall balance of the Eurosystem is much larger as a percentage of the euro area’s GDP.