Page 88 - Special Topic Session (STS) - Volume 4

STS566 Richard Finlay
useful as it provides a broad sense-check on other estimates arrived at
through more abstract means and also offers a tangible basis from which to
think about the transactional stock of cash. We use two approaches to
estimate the stock of cash held in each location:
• estimating the number of a given location (e.g. the number of tills)
and multiplying this by an estimated average amount held per
location; and
• converting flow data to a stock by making assumptions about the
velocity of cash through a particular location.

This method suggests that the transactional stock of cash has risen from
around $9 billion at the end of 2002 to around $13 billion as at June 2018. This
corresponds to an annualised growth rate of around 2 per cent, which is well
below the 6 per cent growth rate in total outstanding banknotes over the same
period. As a result, the transactional stock’s share of the total is estimated to
have fallen from 30 per cent to around 20 per cent by value according to this
method (Graph 6).

4.1.2 The banknote life and banknote processing methods
We now assume that the non-transactional stock of cash consists only
of hoarded $50 and $100 banknotes. While this may not be exactly true, it is
probably not far off the mark: for example, almost all large claims for damaged
banknotes that are submitted to the Reserve Bank are for the $50 and $100
denominations. We then try to find some data affected by this hoarding. In
each of the methods below, this involves data where the $50 and $100
banknotes behave very differently to the other denominations. This difference
can then be used to estimate transactional demand for the $50 and $100.
Adding this to the value of outstanding $5, $10 and $20 banknotes gives an
estimate of overall transactional demand.

The banknote life method
Banknotes reach the end of their lives (become ‘unfit’) for two main reasons:
excessive inkwear, which will tend to increase in a relatively linear fashion with
banknote use; and mechanical defects such as tears, which can be thought of
as random events that can occur at any stage, but whose cumulative
probability of having occurred also increases with use. Given that all
denominations of banknotes are initially of similar physical quality, the speed
at which certain denominations become unfit is closely related to the
frequency with which they are handled. Since banknotes are most commonly
handled when used as a means of payment, banknotes used in transactions
should have a shorter lifespan than banknotes not used in transactions.
If we assume that all banknotes used in transactions wear out at a similar
rate, then the ‘excess life’ of high-denomination banknotes relative to low-

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