Page 90 - Special Topic Session (STS) - Volume 4

STS566 Richard Finlay
cash depot, are transported to an ATM or bank branch, pass to a consumer’s
wallet or purse, get spent at a business, and then get returned to a bank and/or
cash depot. For some legs of this journey we have accurate data – for example,
we know the flow into and out of cash depots, and so can calculate the average
time a banknote spends in a depot – whereas for other aspects we need to
use judgement. Our estimates suggest that the velocity of transactional cash
has declined over the past decade, and that, on average, a transactional
banknote takes a little over one month to complete a full cycle. To estimate
the transactional stock of cash we divide our estimates of cash payments by
our estimates of velocity. With cash payments estimated to be broadly stable
and velocity estimated to be falling, we estimate the transactional stock to be
gradually increasing over recent years and in the range of $15–25 billion
currently. These results suggest that transactional cash accounts for around
20–30 per cent by value of total banknotes (Graph 6).

4.1.4 The seasonality method
The final way we estimate the transactional share of banknotes is via
the seasonality present in banknote demand. The logic works as follows:
demand for cash displays a predictable seasonal pattern, with a peak around
Christmas and a trough in the winter months. This seasonality resembles that
of consumer spending, which suggests that it is driven by seasonality in
transactional cash demand. On the other hand, non-transactional cash
demand (for example, hoarding for store-of-value or numismatic purposes) is
unlikely to contain significant seasonality. As a result, if most cash is
transactional, then the seasonality of cash demand should closely match the
seasonality of cash spending; conversely, if non-transactional demand is more
important, then there will be less seasonality in cash demand than in spending.
As such, and similar to the banknote life and banknote processing methods,
the degree of seasonality present in cash demand, when compared with the
seasonality of cash spending, is an indication of the share of cash used for
transactional purposes. To account for the stock/flow mismatch between
outstanding banknotes and cash lodgements, we adjust the seasonality of the
lodgement data with three estimates of the seasonality present in the velocity
of transactional cash, and then average over the three estimates. Our results
suggest the transactional stock of cash has been largely unchanged over the
past decade. Converting to a share of the value of banknotes outstanding
suggests that transactional demand has declined from around 40 per cent of
banknotes by value in 2009 to 25 per cent currently (Graph 6).

4.1.5 Overview
Overall, the methods that we employ suggest that somewhere
between 20 and 40 per cent by value of outstanding banknotes are used to
facilitate transactions within Australia (Graph 6). Notably, all methods show

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