Inside the Black Box: Tools for Understanding Cash Circulation

58 Pages Posted: 6 Apr 2023

See all articles by Luca Baldo

Luca Baldo

Bank of Italy

Elisa Bonifacio

Bank of Italy

Marco Brandi

Bank of Italy

Michelina Lo Russo

Bank of Italy

Gianluca Maddaloni

Bank of Italy

Andrea Nobili

Bank of Italy

Giorgia Rocco

Bank of Italy

Gabriele Sene

Bank of Italy

Massimo Valentini

Bank of Italy

Date Written: July 14, 2021

Abstract

In this study, we assess the main drivers of banknote circulation in Italy over the last decades by using a number of econometric tools proposed in the literature. We explore the role played by the banknote flows from abroad, changes in the institutional framework and disentangle domestic demand for transaction purposes from other components, including liquidity hoarding. We find that changes in legal limits on cash payment and money holdings for precautionary reasons explain the bulk of cash dynamics. Moreover, the share of transaction demand declined over time becoming of second-order. Finally, we find that, during the pandemic from Covid-19, the exceptional raise in cash circulation was mostly the result of an increase in precautionary demand due to both economic uncertainty and restrictions to mobility that resulted into a marked decline of lodgments to the central bank.

Keywords: cash circulation, cash, payment habits, Covid-19 pandemic

JEL Classification: E41, E42, G2

Suggested Citation

Baldo, Luca and Bonifacio, Elisa and Brandi, Marco and Lo Russo, Michelina and Maddaloni, Gianluca and Nobili, Andrea and Rocco, Giorgia and Sene, Gabriele and Valentini, Massimo, Inside the Black Box: Tools for Understanding Cash Circulation (July 14, 2021). Bank of Italy Markets, Infrastructures, Payment Systems Working Paper No. 7, July 2021, Available at SSRN: https://ssrn.com/abstract=4398724 or http://dx.doi.org/10.2139/ssrn.4398724

Luca Baldo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Elisa Bonifacio

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marco Brandi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Michelina Lo Russo

Bank of Italy ( email )

Gianluca Maddaloni

Bank of Italy ( email )

Andrea Nobili (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giorgia Rocco

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Gabriele Sene

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimo Valentini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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