Currency Use and Payment Patterns.

• Author: Vuchelen, Jef

Although currency plays a crucial role in the payment system, surprisingly little is known about its use. Boeschoten's book is therefore very welcome. It not only provides an adequate overview of the literature but also presents new empirical results on the demand for currency and, especially, on hoarding. Throughout his book, Boeschoten builds strongly on earlier work by the Dutch central bank. The Dutch experience is therefore studied in more detail. However, a cross-section analysis of the demand for currency in 15 industrialized countries is also included, paying special attention to the effects of new payments media such as ATMs, POS terminals and credit cards. In doing so, Boeschoten uses unique data from a questionnaire among central banks. His book is therefore also a useful source of information for monetary researchers. The book contains four chapters.

Chapter 1 gives an overview of the theories that are relevant to the demand for currency. It also summarizes the results of the available empirical studies. Boeschoten's survey shows that the theoretical research on the demand for currency is rather meager. Most theories relate to M1. Those that do deal with currency as such are basically refinements of the inventory approach where currency is opposed to debitable accounts. Clearly, in such a framework, currency will only be used for transactions purposes (and, for that matter, only for small payments). The precautionary and speculative demand will take the form of deposits. And, obviously, there is no room at all for hoarding. This is quite crucial, since large parts of the book are devoted to this phenomenon. In our view, Chapter 1 would therefore have been a far better preamble if more emphasis had been placed on currency rather than on "cash" (i.e., currency and demand deposits), and thus, inevitably, also on the salient gap in the theory. Moreover, one can only regret that Boeschoten did not try to formulate a positive approach to hoarding.

The overview of currency demand functions for a sample of countries shows that the theoretical models are not always confirmed by empirical evidence. Results also vary considerably by country. The evidence for the existence of economies of scale in currency holdings is far from decisive. On the other hand, interest elasticities are, in general, fairly close to zero. There is also little doubt on the substantial negative influence of financial innovations such as checks and credit cards. The...