VoxEU Column Monetary Policy

The cash hoarding puzzle

Although cashless payments are becoming increasingly common, the demand for cash is rising in many advanced economies. One reason for this is cash hoarding. The column uses data on cash issuance to examine the scale of, and motives for, cash hoarding. The two most important drivers are monetary easing and the preference of older people for cash.

In recent years, cashless payment has become increasingly prevalent, whether using conventional methods, or innovative and convenient financial services on mobile phones. This trend will make our economy and financial system more efficient. 

The public has had full access to bank accounts and credit cards for a long time. In recent years, it has also had cashless and contactless payment tools. So it is puzzling that demand for cash has been rising in many economies – especially advanced economies – after the global crisis. This means that the motivation behind the demand for cash is not just to use it for payment. therefore it is important to examine the movement of cash demand, and the factors that contribute to it, by focusing on major advanced economics and emerging economies separately. 

Factors contributing to cash demand

Cash is useful for payment and for other transactions. It is favoured by the elderly and marginalised, low-income people. Cash becomes especially useful when natural disasters cause power shortages and destroys computers. Cash is the safest of payment and financial instruments for the public. 

Many central banks thus decided that retaining some level of cash in society is useful, even though there are high cash-handling costs, and cash-associated crimes. A central bank normally determines the amount of cash to be issued passively, by responding to changes in demand for cash. Therefore, the amount of cash in circulation mainly reflects demand-driven factors, and is beyond the control of a central bank. 

A central bank issues and circulates cash through the banking system by providing commercial banks with cash, withdrawing the equivalent amount from their reserve balances. The commercial banks distribute this cash to the public on demand through windows of bank branches or automated teller machines (ATMs).

The public's cash demand is influenced by: 

  • A transaction motive. It is used for payment, reflecting economic activity. Cash demand tends to grow with an expansion of economic activity.
  • The opportunity cost. In other words, the interest rate. Cash demand grows when the opportunity cost falls.
  • A precautionary motive. This would be, for example, a financial crisis. An intensification of precautionary motives increase demand.
  • Other motives. For example ageing and safe-haven currency demand from abroad increase cash demand.

Cash hoarding is defined as cash lying idle, not being used for payments. Therefore this could be driven by the opportunity cost, precautionary motive, or other motives. As the transaction motive can be proxied by nominal gross domestic product (GDP), we focused on cash in circulation as a percentage of nominal GDP. This allows us to trace the movement of cash demand that is driven by factors other than transaction demand. 

Different patterns between advanced and emerging economies

We examined cash demand in 22 economies, which were classified into advanced or emerging economies. This classification was made because the degree of the public’s access to the banking system varies between the two categories, and the stage of economic development is likely to generate different impacts. In emerging economies, a decline in the cash ratio may suggest that the financial intermediation function of the banking system has strengthened, that there is an improved monetary policy transmission mechanism, or fewer informal and illegal activities. 

Figure 1 shows the average amounts of cash in circulation as a percentage of GDP between 2000 and 2018 by classifying 11 advanced economies into three types (Figure 1): 

  • Economies with a rising trend. The economies with a rising trend included the euro area, Japan, Korea, Singapore, the UK, and the US. The rising trend strengthened especially after economic uncertainty rose in the global crisis of 2008 and 2009. 
  • Economies roughly with a stable trend. Economies include Australia and Canada.
  • Economies with a declining trend. These include Demark, Norway, and Sweden, which all have a well-developed cashless and contactless payment system.

Japan’s ratio has always exceeded other economies by a wide margin, recently increasing to around 20%. Japan’s high cash demand may reflect high levels of public trust in the stable government and legal tender, alongside persistent low inflation. In addition, a series of monetary easing measures conducted by the Bank of Japan, as well as several tax-revenue raising measures adopted by the government between 2014 and 2016, appear to have stimulated cash demand. 

Figure 1 Cash in circulation in the advanced economies (% of nominal GDP)


Source: Authors, based on CEIC.

Similarly, in Figure 2, 11 emerging economies have been classified into the three types. The economies with a rising ratio included Mexico, the Philippines, Poland, Thailand, and Turkey. The rising trend started in the early 2000s. The economies with a stable ratio included Brazil, Indonesia, Malaysia, and Russia, as well as India (with the exception of a recent sharp drop due to the impact of the 2016 demonetisation currency reform). China was the only economy with a secular declining trend from the early 2000s onwards. This may reflect a shift in the form of money held by the public, from cash to bank deposits and other cashless payment tools (such as Alipay or WeChat Pay). 

Figure 2 Cash in circulation in the emerging economies (% of nominal GDP)


Source: Authors, based on CEIC.

Cash hoarding and high-denomination banknotes

Demand for high-denomination banknotes is likely to be associated with cash hoarding. Demand may become more important during a financial crisis, because of concerns about the solvency of financial institutions might encourage precautionary holdings (Cusbert and Rohling 2013). Demand for higher-denomination banknotes could be associated negatively with changes in interest rates (Arango-Arango and Suarez-Ariza 2019). 

Consistent time series on outstanding banknotes classified by denomination are available for seven economies – Canada, the euro area, Japan, South Korea, UK, Poland and US. These economies can be classified into two groups: 

  • Dominant largest-denomination banknotes. This group consists of Japan, South Korea, and US.
  • Dominant middle-denomination banknotes. This group consists of Canada, the euro area, Poland, and UK. 

In the first group, the outstanding issuance amount of the largest 10,000-yen note in Japan has always been largest over the observation period, and the pace of issuance has increased since 2013 when the Bank of Japan adopted Quantitative and Qualitative Monetary Easing (Figure 3). 

Figure 3 Banknotes issued by denomination in Japan (billions)


Source: CEIC

The US has experienced a rapid rise in the outstanding amount of the $100 note since the global crisis and exceeded those of smaller-denomination banknotes recently (Figure 4). 

Figure 4 Banknotes issued by denomination in the US (billions)


Source: CEIC

Japan, South Korea, and the US indicate the presence of high and rising demand for cash holdings since large-denomination banknotes are the best way to hold cash (Otani and Suzuki 2008, Fujiki and Nakashima 2019). In the US, the rising trend of US$100 issuance is attributable to not only domestic demand but also foreign demand for a safe-haven currency, especially from emerging economies (Haasl et al. 2018, Judson 2017). High demand for banknotes from abroad is unique to the US dollar, given its dominance in cross-border trade, financial, and other transactions. Foreign holdings of US dollar banknotes take place through immigrants, tourists, or other cash flows – especially from the US to Mexico; also commercial cross-border cash transfers. Judson (2017) estimated that foreign demand accounts for more than 60% of all US dollar banknotes, and nearly 80% of $100 banknotes. 

Where middle-denomination banknotes are dominant, they dominate both larger and smaller denominations. The public uses cash only for low-value transactions, and uses credit cards or other cashless payment tools for higher-value transactions. In the euro area, the limited usage of the €500 note indicates that there was a limited adverse impact from the ECB’s decision in 2016 to stop printing it at the end of April 2019 (Figure 5). 

Figure 5 Banknotes issued by denomination in the euro area (billions)


Source: CEIC

Monetary easing and ageing are important drivers for cash hoarding

We conducted separate empirical analyses were conducted on the euro area, Japan, and US, using the ratio of cash in circulation to nominal GDP as a dependent variable. Independent variables included the opportunity cost (proxied by the central bank policy rate, or the 10-year government bond yield), the precautionary motive (proxied by a dummy variable, equal to one during the IT bubble burst and following the global crisis and zero otherwise, or the stock market volatility index), age-related variables (proxied by life expectancy, or the ratio of population aged 65 or over), and demand from abroad (proxied by the nominal effective exchange rate). 

The most robust variable in all three economies was the central bank policy rate. The other statistically significant variable was the age-related factor – cash is relatively prevalent when there is a large share of elderly population, because the elderly have the habit of using cash, and an affinity for it. Some elderly people also stop using credit cards after retirement. 

When we conducted similar analyses for pooled-data regressions covering all 22 economies, the central policy rate and age factors were still the most important determinants of demand for cash in these economies. 

The impact on monetary policy

Rising amounts of cash in circulation might have several impacts on monetary policy too. On one hand, cash hoarding erodes the effectiveness of monetary policy by weakening the money creation process. On the other hand, greater cash issuance increases a central bank’s income through greater seigniorage. 

Moreover, greater cash use makes the economy less efficient. There are higher cash-handling costs, both direct (cost of paper and design fees to prevent counterfeiting) and indirect (the security and personnel cost, payment services by commercial banks, shops, firms, and individuals). It may also discourage new technology firms from entering into innovative payment and financial activities. 


Arango-Arango, C A and N F Suarez-Ariza (2019), "Digital Payments Adoption and the Demand for Cash: New International Evidence", Banco de la Republica de Columbia, Borradores de ECONOMIA 1074. 

Cusbert, T and T Rohling (2013), "Currency Demand during the Global Financial Crisis: Evidence from Australia", Reserve Bank of Australia research discussion paper 2013-01. 

Fujiki, H and K Nakashima (2019), "Cash Usage Trends in Japan: Evidence Using Aggregate and Household Survey Data", Tokyo Center for Economic Research working paper e131.

Judson, R (2017), "The Death of Cash? Not So Fast: Demand for US Currency at Home and Abroad, 1990–2016”, Deutsche Bundesbank International Cash Conference 2017 – War on Cash: Is there a Future for Cash?

Otani, A, and T Suzuki (2008), "Background to the High Level of Banknotes in Circulation and Demand Deposits", Bank of Japan Review 2008E-5

Haasl, T, S Schulhofer-Wohl, and A Paulson (2018), "Understanding the Demand for Currency at Home and Abroad", Chicago Fed Letter 396.

Shirai, S and E A Sugandi (2019), "What Explains the Growing Global Demand for Cash?", Asian Development Bank Institute working paper 1006.

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