The paradox of banknotes: understanding the demand for cash beyond transactional use

In most countries, usage of cash may be declining but demand for currency remains as strong.

Alejandro Zamora-Pérez analyse this paradox in this ECB article:

A phenomenon referred to as the “paradox of banknotes” has been observed in the euro area; in recent years, the demand for euro banknotes has constantly increased while the use of banknotes for retail transactions seems to have decreased. Recent payment surveys indicate that the share of cash transactions in the euro area has decreased. This, together with ongoing digitalisation in retail payments, might have been expected to lead to a decrease in the demand for cash.[2] However, this reduction in demand has not occurred. In fact, the number of euro banknotes in circulation has increased since 2007 (see Chart 1). This seemingly counterintuitive paradox can be explained by demand for banknotes as a store of value in the euro area (e.g. euro area citizens holding cash savings) coupled with demand for euro banknotes outside the euro area. This article will use the available evidence to explain this phenomenon in more detail.

One Response to “The paradox of banknotes: understanding the demand for cash beyond transactional use”

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