Currency Velocity and Cash Payments in the US Economy: The Currency Enigma
54 Pages Posted: 8 Feb 2016
Date Written: January 1, 1989
This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation and hence the currency velocity (turnovers per year) of each denomination. The velocity of currency times the stock of currency produces estimates of the annual volume of cash payments. Since the volume of check payments (debits to checkable accounts) is regularly recorded, our estimates of cash payments can be used to estimate the total volume of transactions (MV) from the payment side of Fisher’s equation of exchange. The paper goes on to examine the “currency enigma” from the perspective of both “missing currency” and “missing payments”. The estimated volume of cash payments is so high when compared to personal consumption expenditures, that one is led to the conclusion that a large fraction of the US currency supply is held abroad, and that there is a sizable underground (unreported and perhaps unrecorded) economy in the United States.
Keywords: Currency, velocity, Cash payments, Quantity theory, underground economy, transactions, turnover, monetary demography
JEL Classification: E51, O17, E26, E01, J11, E41, H26
Suggested Citation: Suggested Citation