Modeling the Share of Cash Payments in the Economy: An Application to France

22 Pages Posted: 21 Aug 2012

Date Written: July 1, 2012

Abstract

Modeling the demand for cash and deposits is a primary concern for central banks. Within a wide range of academic contributions, payment choice models based on transaction sizes (TS models) have been promoted. However, TS models induce strong predictions about the use of payment instruments. In particular, all equal-sized transactions are supposed to be paid with the same payment instrument. We propose a simple alternative model based on cash holding (CH model) that allows equal-sized transactions to be paid for in cash or with other payment instruments. Using micro-level payment data from two representative samples of the French population in 2005 and 2011, we test how well each model replicates the observed shares of cash payments in the French economy for each size of transaction. We find that the CH model outperforms TS models as it better predicts the observed shares of cash payments with notably less demanding information on individuals.

Keywords: Demand for cash, Payment Instruments

JEL Classification: E41, G2

Suggested Citation

Bouhdaoui, Yassine and Bounie, David, Modeling the Share of Cash Payments in the Economy: An Application to France (July 1, 2012). Available at SSRN: https://ssrn.com/abstract=2132449 or http://dx.doi.org/10.2139/ssrn.2132449

Yassine Bouhdaoui

Vrije Universiteit Brussel ( email )

Boulevard de la Plaine 2
Ixelles, 1050
Belgium

David Bounie (Contact Author)

Télécom Paris ( email )

19 Place Marguerite Perey
Palaiseau, 91120
France

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