Using Cash to Monitor Liquidity: Implications for Payments, Currency Demand and Withdrawal Behavior

68 Pages Posted: 8 Jun 2016

See all articles by Ulf von Kalckreuth

Ulf von Kalckreuth

Deutsche Bundesbank - Economic Research Centre

Tobias Schmidt

Deutsche Bundesbank - Research Center

Helmut Stix

Oesterreichische Nationalbank - Economic Studies Division

Multiple version iconThere are 2 versions of this paper

Date Written: 2011

Abstract

Standard transaction cost arguments can only partially explain why the share of cash transactions is still high in many countries. This paper shows that consumers' desire to monitor liquidity is one of the reasons. Consumers make use of a distinctive feature of cash - a glance into one's pocket provides a signal for both the remaining budget as well as the level of past expenses. We propose a theoretical framework which incorporates this feature of cash, and derives implications not only for cash usage as such but also for a broader set of paymentrelated activities. Survey data from Germany on consumers' payment and withdrawal patterns are used to test these implications empirically. The data are consistent with all theoretical predictions: consumers who need to keep control over their remaining liquidity and who have elevated costs of information processing and storage will conduct a larger percentage of their payments using cash, hold fewer non-cash payment instruments, withdraw less often and hold larger cash balances than other consumers. Such consumers also use payment cards for some transactions; they switch to non-cash payment instruments only at higher transaction values than other consumers, however. Our model provides an explanation of why cash usage has declined only slowly in some countries despite broad diffusion of non-cash means of payment.

Keywords: payment behavior, payment instruments, withdrawal behavior, payment cards, payment innovation, cash usage, currency demand, survey data

JEL Classification: E41, E58, D12

Suggested Citation

von Kalckreuth, Ulf and Schmidt, Tobias and Stix, Helmut, Using Cash to Monitor Liquidity: Implications for Payments, Currency Demand and Withdrawal Behavior (2011). Bundesbank Series 1 Discussion Paper No. 2011,22. Available at SSRN: https://ssrn.com/abstract=2785421

Ulf Von Kalckreuth (Contact Author)

Deutsche Bundesbank - Economic Research Centre ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Tobias Schmidt

Deutsche Bundesbank - Research Center ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Helmut Stix

Oesterreichische Nationalbank - Economic Studies Division ( email )

Otto-Wagner Platz 3
POB 61
Vienna 1011
Austria

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