Page 89 - Special Topic Session (STS) - Volume 4

STS566 Richard Finlay
denomination banknotes can be attributed to hoarding. Based on this insight,
we estimate that over the past three decades the share of $100 banknotes
used for transactions has fallen from around 20 per cent to just 3 per cent; the
share of $50 banknotes used for transactions has fallen from around 35 per
cent to 25 per cent; and the transactional share by value of all banknotes has
fallen from around 45 per cent to around 20 per cent (Graph 6).

The banknote processing method
One can apply the same idea to data on the frequency with which different
banknote denominations are processed by cash depots. In particular, cash
depots process and fitness-sort banknotes lodged by commercial banks and
large retailers, but do not process any banknotes that are hoarded or
otherwise are not part of the transactional stock of cash. Thus, broadly
speaking, only the transactional stock of banknotes passes through cash
depots, and the rate at which banknotes pass through depots is an indication
of transactional cash use. Given this, if we assume that the processing
frequency of transactional $50 and $100 banknotes is equal to the processing
frequency of the $20 banknote, then the difference between the observed
processing frequency of $50 and $100 banknotes and that of the $20 is the
result of hoarding. In fact the true processing frequency of transactional $50
and $100 banknotes is likely to be higher than the $20 denomination as almost
all $50 and $100 banknotes received by retailers will be banked, whereas some
$20 banknotes will be given as change. This suggests that this method will
deliver an upwardly biased transactional share estimate. Applying the same
technique used in the banknote life calculations suggests that the
transactional stock has fallen from around 55 per cent by value of total
outstanding banknotes in the late 1990s to around 40 per cent now (Graph 6).

4.1.3 The velocity method
Another way to estimate the stock of cash used for transactions is to
first estimate the flow of cash payments made by consumers, and then convert
this flow into a stock. The flow of cash payments and the stock of banknotes
used to make them are related, but one banknote can be used in multiple
transactions; banknote velocity ties the two concepts together, as described
in the equation below.

Flow of cash payments = Velocity of transactional stock × Value of
transactional stock.

We estimate the flow of cash payments through time by scaling the value of
card payments with the cash-to-card payment ratio as recorded periodically
in the Reserve Bank’s Consumer Payment Survey (CPS). To estimate the
velocity of transactional cash, we map out the cash cycle: banknotes start at a

78 | I S I W S C 2 0 1 9