## 1. De-Cashing: The Macroeconomic Framework

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### Introduction
- De-cashing defined: gradual phasing out of currency from circulation and replacement with convertible deposits.
- Objective of paper: suggest a simple framework to analyze macroeconomic implications of de-cashing using a four-sector macroeconomics framework disaggregated into real, fiscal, monetary, and external sectors.
- Paper does not take a policy stance for/against de-cashing and does not review demonetization episodes or legal/ethical/political issues.
- Examples of policy steps already used by authorities:
  - Abolishing large denomination bills.
  - Imposing ceilings on cash transactions.
  - Declaration requirements on carriage of cash in/out of country.
  - Reporting requirements for cash payments exceeding specified amounts.
  - Taxing cash transactions.

### Use of Cash — key empirical observations
- Cash usage and denomination facts:
  - Cash remains extensively used worldwide, particularly for small transactions.
  - In a study of Australia, Austria, Canada, France, Germany, the Netherlands, and the United States, currency accounts for more than half of transactions by number everywhere except the United States.
  - Since introduction of the Euro, cash in circulation has more than quadrupled in the Eurozone; in 2016 cash stood at more than €1 trillion.
  - United States 2012 survey: if transaction amount is less than $20, probability settled in cash is over 90 percent; if transaction is larger than $20, probability decreases to 57 percent (Bundesbank, 2014).
  - Low denomination notes used mainly for small daily transactions; high denomination notes represent the bulk of currency in circulation but are rarely used for daily payments.
  - High denomination examples: US $50 to US $100; €50 to 500; ¥ 5,000 to 10,000; Kr 500 to 1,000.
  - High denomination notes represent 80-90 percent of currency in circulation.
- Institutional risks and overseas circulation:
  - Facilitate money laundering (transportability): US $1 million in $100 bills weighs 22 pounds; one million dollars in €500 notes would weigh less than 3 pounds.
  - Counterfeiting risk higher for large denominations.
  - Overseas circulation outside central bank supervision: estimate for the United States suggests about 65 percent ($580 billion) of all banknotes are in circulation outside of the U.S.
- Trends toward cashless transactions:
  - Federal Reserve estimate: in 2016 cashless transactions amounted to US $617 bn, up from US $60 bn in 2010.
  - Germany: 33 percent of consumer transactions are cashless.
  - Sweden: in 2015 cash transactions made up barely 2 percent of the value of all payments and may drop to 0.5 percent by 2020; in shops cash used for barely 20 percent of transactions (half the number from five years earlier), compared with a global average of 75 percent (Riksbank, 2016).
  - Similar de-cashing trends observed in Norway, Denmark, and Finland.
- Policy and private-sector measures restricting cash:
  - ECB decision in 2016 to abolish the €500 banknote.
  - Examples: Canada’s $1,000 note abolished in 2000; Singapore’s $10,000 note abolished in 2014.
  - Sweden: all older banknotes and coins, except the 10-krona coin, will become invalid by end-2017; some will not be replaced by new ones.
  - Restrictions on cash payments in place in 12 of the 28 EU member states (Bundesbank, 2016).
  - Reporting/declaration requirements: U.S. Title 26 prohibits carrying more than US $10,000 into the country without reporting; EU requires declaration of sums exceeding €10,000 in cash to customs authorities.
  - Private-sector practices: businesses refusing large denomination bills; Sweden examples—about 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits.

### MACRO-ANALYTICS OF DE-CASHING — Cash Economics: Primer
- Definitions and classifications (MFSM 2016 and SNA concepts):
  - Currency (notes and coins) = cash; financial instruments of fixed nominal values issued/authorized by central banks or governments.
  - Currency in circulation = amount of currency outside the central bank held by residents and non-residents.
  - Money broader than currency: includes transferable deposits and short-term deposits readily convertible into banknotes and coins.
  - Transferable deposits: exchangeable for currency on demand at par, directly usable for payments to third parties (check, draft, giro order, direct debit/credit, or other direct payment facility).
  - Electronic money is a special case of transferable deposits and is classified as deposits rather than currency (examples: electronic purse, prepaid cards, web-based electronic money, mobile money).
  - Internet-based currency (e.g., Bitcoins) is not electronic money under these definitions (not issued by a central bank; not widely accepted as medium of exchange).
- Functional equivalence and differences:
  - Similarities (both part of broad money): medium of exchange, immediately exchangeable on demand at par, possible legal tender, fixed nominal face values, divisible, no maturity, immediate accessibility, no or very low transaction costs, earn no or low interest.
  - Differences: currency can become physically obsolete; currency payments are anonymous; currency prone to counterfeiting; transferable deposits are personified and traceable, implying transaction records for issuing banks and, via law, tax and law enforcement authorities—raising privacy concerns.
- Accounting mechanics when central bank places currency into circulation:
  - Central bank reduces transferable deposits of the commercial bank and increases currency in circulation.
  - Commercial bank increases domestic currency and decreases transferable deposits at the central bank.
  - Currency becomes part of broad money only when bank clients exchange deposits for currency (currency outside banks).

### MACRO-ANALYTICS OF DE-CASHING — Macroeconomic Framework
- Analytical approach: use System of National Accounts (SNA) to subdivide economy into five sectors: households, enterprises, financial intermediaries, the government, and the rest of the world.
- Core national accounting identities (simplified):
  - Supply of resources = domestic output Y and imports IM.
  - Uses of resources = private and public consumption C, investment I, and exports X.
  - Income generated by output equals sum of final uses.
  - Income not consumed equals saving S; difference between exports and imports equals current account CA.
  - Ex post, saving minus investment equals the current account balance (saving-investment balance = current account).
- Implication: current account deficit arises when investment exceeds saving; current account surplus when saving exceeds investment. Saving–investment/current account identity is the fundamental prism for tracing de-cashing effects across sectors.

### Monetary Accounts, Broad Money, and Reserves
- Key accounting relations:
  - Change in reserves R (assumed equal to central bank NFA with no changes in commercial banks’ NFA) plus changes in net domestic assets NDA determine changes in broad money M: R + NDA = M.
  - NDA drivers: net credit to government Cg, credit to private sector Cp, and other items net OIN.
  - Money of external origin = NFA (reserves); money of domestic origin = NDA (domestic credit).
  - Unless sterilized, accumulation of international reserves increases broad money for a given level of domestic credit; excess reserves or domestic credit expansion can spur inflationary pressure.
- Exchange rate linkages:
  - Exchange rate level reflects supply and demand for currency between domestic residents and rest of world.
  - Flows affecting exchange rate include current account transactions, financial account transactions, and transactions with international reserves.
  - All three BOP accounts—current account, financial account, and international reserves—impact the exchange rate.

### How De-Cashing Enters the Framework
- De-cashing affects the saving–investment balance via variables in the real, fiscal, external, and monetary sectors.
- Real sector: shift of means of payment from paper currency to electronic means, affecting private consumption and private investment.
- Fiscal sector: effects on seigniorage (non-tax revenue) and reduced currency printing and transaction costs.
- External sector: private saving–investment interplay may affect the current account.
- Monetary sector: assets side — credit to private sector will need to be de-cashed; liabilities side — reserve money composition shifts from currency toward deposits.

### Monetary Effects of De-Cashing
- Primary impulse: drop in demand for currency; central bank rebalances liabilities between currency and transferable deposits with no net impact on money supply if offset fully by increased transferable deposits.
- Asset side: net foreign assets (money of external origin) are unaffected; possible rebalancing between net claims on government and private sector.
- If public sector reduces currency demand more than private sector (e.g., public salaries and taxes paid cashless), rebalancing is mechanical and money supply impact is neutral.
- Currency demand modeling should incorporate de-cashing incentives (e.g., ECM with cointegration between currency holdings, GDP, interest rates) and additional variables: number of ATMs, fund transfer terminals, bank branches per capita, ratio of self-employment to total employment, projected share of salaries paid in cash, implicit opportunity cost of holding cash, number of checking and other transferable accounts.
- Transmission mechanism improvements:
  - De-cashing may make monetary policy transmission easier as fewer non-interest-bearing cash holdings lead to faster reaction of money market, interbank, bank deposit, and lending rates to policy rate changes.
  - Negative interest rate policy becomes more feasible if cash savings are discouraged; with de-cashing most money stored in banks and affected by negative rates to encourage spending.
  - Caveat: in economies with large cash shares, even small negative rates could trigger sudden jumps in cash demand and require increased cash supply; eliminating cash and prepaid cards would be controversial and may not fully prevent asset switching (other countries’ currencies, virtual currencies, gold, real estate).
- Banking implications:
  - Fresh deposits from de-cashing can boost lending where depositor base is weak, potentially lowering lending rates and increasing borrowing and growth.
  - Constraints remain: zero lower bound, excess liquidity, capital requirements, and sound lending standards.
- Early-warning signal loss:
  - Demand for cash can predict financial crises (e.g., September 2008 surge in cash demand). Full de-cashing might remove this signal, though agents could switch to other safe stores (gold, other currencies), which could still function as indicators.
- Central bank independence and seigniorage:
  - De-cashing reduces seigniorage revenue and currency issuance costs; for many central banks seigniorage is not a significant revenue source and often transferred to the general budget.
  - Seigniorage from high denomination notes does not exceed 0.1 percent of GDP in the USA, the Eurozone, Japan, the UK, and Switzerland (Sands, 2016).
  - Illustrative seigniorage figures:
    - United States FY 2017 seigniorage: 0.46 per one dollar issued (US Mint, 2017); seigniorage payments amount to about US$ 70 billion a year.
    - Sweden: seigniorage represents 1.1 percent of the central bank’s balance sheet (The Riksbank, 2015).
  - In numerous emerging markets seigniorage is more important for central bank financial independence; de-cashing would dramatically reduce printing/minting/retiring costs.

### Real Effects of De-Cashing
- Growth impacts:
  - Potential positive: reduced transaction costs estimated at about 2-2.5 percent of GDP (Bundesbank, 2014) could raise profits, investment, and growth; reduction in underground/grey economy could increase officially measured GDP.
  - Potential negative: private investment activities settled in cash (house construction, remodeling, remittance-financed activities) may be disrupted; elimination of high denomination notes could force use of more lower denomination notes increasing transaction costs; forced de-cashing without public support could cause social unrest and GDP losses.
- Sectoral impacts:
  - Cash use typically higher in the private sector, implying greater effects in tertiary sector and secondary sector where private role is large; marginal impact on natural resources (public ownership).
- Demand side:
  - De-cashing affects private consumption and private investment; private consumption is sensitive to net disposable income and precautionary cash holdings.
  - Private consumption is a significant GDP component and may be conducted substantially in paper currency; de-cashing may temporarily hamper consumption and investment.
  - Public consumption and investment (usually non-cash transactions) likely less affected.

### Fiscal channel and mechanisms
- Fiscal balance linked to public sector saving–investment balance; changes in government revenue and consumption from de-cashing translate into changes in government saving and the current account (given unchanged public investment and private saving–investment balance).
- Direction of fiscal shift depends on relative impacts on specific revenue and expenditure lines.

Effects on tax collection
- Principle: de-cashing should improve tax collection by reducing tax evasion because electronic transactions leave verifiable trails.
- Empirical examples:
  - Sweden benefited from more efficient tax collection with de-cashing.
  - Greece and Italy: heavy cash use contributes to persistent tax evasion.
- Evidence and caveats:
  - Electronic tax payments widely used as tax-control instrument but impose compliance costs on taxpayers.
  - Recent studies: electronic payments did not appear to influence VAT collection, while negative effects of cash collection on VAT performance are unambiguous where electronic cash payments are well-established (Bundesbank 2014).
  - Electronic payments may enable new evasion forms and incentivize barter, which could hamper tax collection.

Magnitude of potential tax revenue gains (illustrative figures)
- U.S. tax gap (IRS estimate): US$ 458 bn average in 2008-2010; major components: underreporting of individual income tax US$ 264 bn and employment tax US$ 84 bn.
  - Illustration: if eliminating US$100 bills led to collection of 10 percent of this gap, additional tax contribution would be US$ 35 bn a year.
- European Union tax evasion estimate: €1 trillion a year (EU, 2017).
  - Illustration: elimination of large denomination Euro and pound bills could recover €100 bn in tax arrears under similar assumptions.
- Developing countries: additional tax revenue hard to estimate due to paucity of tax compliance gap analysis.

Interest expenditure and seigniorage
- Central banks typically put currency into circulation by purchasing government bonds on the secondary market; this can increase bond demand and lower government interest rates.
- Governments pay interest to central banks on these bonds; these payments are seigniorage transfers and can be substantial.
- Net effect on consolidated public sector balance unclear because interest payments are transfers between central bank and ministry of finance.

Non-tax revenue effects (profit on currency issuance)
- Government revenue from currency issuance equals nominal value less acquisition/distribution/maintenance costs.
- If nominal currency issued declines with de-cashing, government non-tax revenue from currency issuance would decline.

Budgetary and transition costs
- De-cashing requires institutional and legislative reforms, technical complexity, personnel training, procurement of equipment/technology, regulatory redrafting, and enforcement capacity strengthening.
- Potential expenditure increases: wages and salaries (hiring/training), procurement of goods and services, investment in electronic payment infrastructure.
- Financing options: domestic financing or external support (loans recorded as financing or grants included in revenue).

Net fiscal implications (ambiguous)
- Revenue side:
  - Tax revenue most likely to increase due to better collection.
  - Non-tax revenue most likely to drop with lower profit transfers from seigniorage.
- Expenditure side:
  - Interest expenditure paid to central bank on government bonds likely lower.
  - Additional transition-period expenditure likely to increase wages, goods and services, and capital procurement.
- Prolonged transition periods could smooth negative impacts as increased tax collection offsets some losses.

### Balance of payments effects
- De-cashing impact on most BOP flows likely marginal, especially for small to medium-sized countries; primarily a domestic operation.
- Current account: affected mainly via the government saving–investment balance.
  - If fiscal balance improves (tax gains > non-tax losses and transition costs), current account should improve—mainly via stronger exports reflecting government investment in infrastructure, competitiveness, and business environment.
  - If de-cashing requires additional imports of equipment/technology, current account may temporarily worsen.
- Cross-border payments and remittances:
  - Distributed ledger-like technology can dramatically reduce international transfer costs; remittance costs: about 8 percent via traditional channels vs about 1 percent with electronic money (Goldman Sachs, 2014).
  - Blockchain-based remittance intermediaries already operate in some economies (Philippines, Kenya) offering Bitcoin-mediated transfers with conversion back into fiat.
- Loss of international seigniorage/foreign-held currency benefits:
  - Large holdings of U.S. currency outside the United States effectively represent a roughly $500 billion zero-interest loan to America; estimated worth around $20 billion a year, or roughly 0.15 percent of GDP (Krugman, 2013).

### Structural and social effects
- Financial inclusiveness:
  - Shift to transferable deposits requires consumers to have debit accounts; small businesses accepting bank money can increase profits via accessible payment means.
  - Poorest populations without access to computers/mobile phones risk losing cash as a primary savings medium.
- Migration and labor market:
  - Reduced cash can lower illegal migration by removing cash payment options that attract informal labor.
- Environmental effects:
  - Polymer banknotes (used in over 20 countries) lead to a 32 percent reduction in global warming potential and a 30 percent reduction in primary energy demand compared with paper (Wang, 2016).
  - Transferable deposits outperform both paper and polymer currency environmentally as they require no production/disposal.
- Social implications and rights:
  - Cash perceived as a human right in some constitutions; de-cashing may be perceived as violating freedom of contract and ownership.
  - Electronic funds are vulnerable to hacking; electronic fraud cases have more than doubled in the past decade.
  - De-cashing removes tacit forms of social support: informal cash-based microentrepreneurship and forgone tax payments that act as implicit social assistance would be eliminated and require replacement by formal social protections.
  - Currency substitution risk: inadequate domestic currency availability during de-cashing could prompt use of foreign or surrogate currencies for opaque transactions.

### Conclusions and policy options (key recommendations and trade-offs)
- De-cashing is a long-term project; complete cashlessness should be phased.
  - Initial steps: phase out large denomination bills, ceilings on cash transactions, reporting of cross-border cash movements.
  - Further steps: economic incentives to reduce cash use, simplify opening/use of transferable deposits, further computerize the financial system.
- Prefer private-sector-led de-cashing over public-sector-led:
  - Private-led change is largely benign and market-driven; public-led mandates risk strong objections.
  - Avoid imposing de-cashing by decree; pursue targeted outreach to reduce public suspicion.
  - Base de-cashing on individual consumer choice and cost–benefit considerations.
- Net macroeconomic impact likely positive but contingent on balancing costs and benefits:
  - Potential benefits listed:
    - Raise recorded GDP growth (lower transaction costs, formalization of informal economy).
    - Expand tax base.
    - Reduce interest payments.
    - Improve monetary policy transmission.
    - Expand deposit base and credit.
    - Improve current account via public-sector balance and cheaper remittances.
    - Enhance financial inclusiveness.
    - Reduce central bank currency production costs.
  - Potential costs/risks listed:
    - Temporary frictions across sectors (disruptions in cash-heavy consumption and investment, social tensions).
    - Substantial fiscal transition costs.
    - Potential loss of seigniorage and central bank indicators.
    - Possible exclusion of poorest without digital access.
    - Temporary current account deterioration from capital imports for de-cashing.
    - Social strains among digitally inexperienced populations.
    - Elimination of tacit social protections requiring formal replacements.
    - Risk of currency substitution.

### Coordinated efforts and implementation considerations
- Coordination across major currencies recommended to enhance positive effects and reduce cross-border arbitrage/unintended spillovers.
- Coordinated decisions important for phasing out large denomination bills, ceilings on cash transactions, reporting requirements, or taxation of cash transactions.
- For currency areas, a single de-cashing policy preferable to divergent national approaches.
- Public–private consensus building and outreach on gradual de-cashing modalities are essential preconditions for acceptance and effectiveness.

*Source: wp1771 - 1. De-Cashing: The Macroeconomic Framework*

### 1. De-Cashing: The Macroeconomic Framework ................................................................. 11

### 1. De-Cashing: The Macroeconomic Framework

### Introduction
- De-cashing is defined as the gradual phasing out of currency from circulation and its replacement with convertible deposits.
- The initiative reduces the role of currency (cash component) in favor of transferrable deposits (non-cash component).
- Examples of policy steps already taken by monetary authorities:
  - Abolishing large denomination bills.
  - Imposing ceilings on cash transactions.
  - Introducing declaration requirements on the carriage of cash in and out of the country.
  - Reporting requirements for cash payments exceeding a specified amount.
  - Taxing cash transactions.
- Purpose of the paper: suggest a simple framework to analyze macroeconomic implications of de-cashing using a four-sector macroeconomics framework disaggregated into real, fiscal, monetary, and external sectors.
- The paper does not take a policy stance for or against de-cashing and does not review recent demonetization episodes or legal/ethical/political issues.

### The Use of Cash — key empirical observations
- Cash remains extensively used worldwide, particularly for small transactions.
- In a study of Australia, Austria, Canada, France, Germany, the Netherlands, and the United States, currency accounts for more than half of transactions by number everywhere except the United States.
- Since the introduction of the Euro, cash in circulation has more than quadrupled in the Eurozone; in 2016 cash stood at more than €1 trillion.
- United States 2012 survey: if transaction amount is less than $20, probability settled in cash is over 90 percent; if transaction is larger than $20, probability decreases to 57 percent (Bundesbank, 2014).
- Cash characteristics and uses:
  - Technically simple, safe, private; helps control spending and plan a budget.
  - Usable without sophisticated infrastructure or electricity; important in emergencies.
  - Viewed as a fundamental human right by many; symbolically important in monetary unions.
- Denomination patterns:
  - Low denomination banknotes used mainly for small daily transactions.
  - High denomination banknotes represent the bulk of currency in circulation but are rarely used for daily payments.
  - High denomination examples: US $50 to US $100; €50 to 500; ¥ 5,000 to 10,000; Kr 500 to 1,000.
  - High denomination notes represent 80-90 percent of currency in circulation.
- Institutional risks of large denominations:
  - Facilitate money laundering (transportability): US $1 million in $100 bills weighs 22 pounds; one million dollars in €500 notes would weigh less than 3 pounds.
  - Counterfeiting risk higher for large denominations.
  - Overseas circulation outside central bank supervision; estimate for the United States suggests about 65 percent ($580 billion) of all banknotes are in circulation outside of the U.S.
- Trends toward cashless transactions:
  - Federal Reserve estimate: in 2016 cashless transactions amounted to US $617 bn, up from US $60 bn in 2010.
  - Germany: 33 percent of consumer transactions are cashless.
  - Sweden: in 2015 cash transactions made up barely 2 percent of the value of all payments and may drop to 0.5 percent by 2020; in shops cash used for barely 20 percent of transactions (half the number from five years earlier), compared with a global average of 75 percent (Riksbank, 2016).
  - Similar de-cashing trends observed in Norway, Denmark, and Finland.
- Policy and private-sector measures restricting cash:
  - ECB decision in 2016 to abolish the €500 banknote.
  - Examples of abolished large notes: Canada’s $1,000 note in 2000; Singapore’s $10,000 note in 2014.
  - Sweden: all older banknotes and coins, except the 10-krona coin, will become invalid by end-2017; some will not be replaced by new ones.
  - Restrictions on cash payments are currently in place in 12 of the 28 EU member states (Bundesbank, 2016).
  - Discussions in the Eurozone about imposing a ceiling of €5,000 on cash payments.
  - Reporting/declaration requirements: U.S. Title 26 prohibits carrying more than US $10,000 into the country without reporting; EU requires declaration of sums exceeding €10,000 in cash to customs authorities.
  - Private-sector practices: businesses refusing large denomination bills; Sweden examples—about 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits; many banks no longer accept or dispense cash; buses, metro systems, retailers often refuse cash.

### MACRO-ANALYTICS OF DE-CASHING — Cash Economics: Primer
- Definitions and classifications (based on MFSM 2016 and SNA concepts):
  - Currency (notes and coins) = cash; financial instruments of fixed nominal values issued/authorized by central banks or governments.
  - Currency in circulation = amount of currency outside the central bank held by residents and non-residents.
  - Money is broader than currency and includes transferrable deposits and short-term deposits that are readily convertible into banknotes and coins.
  - Transferable deposits: exchangeable for currency on demand at par, directly usable for payments to third parties (check, draft, giro order, direct debit/credit, or other direct payment facility).
  - Electronic money is a special case of transferable deposits and is classified as deposits rather than currency; examples: electronic purse, prepaid cards (subject to definition), web-based electronic money (e.g., PayPal), mobile money (e.g., M-Pesa).
  - Internet-based currency (e.g., Bitcoins) is not electronic money under these definitions (not issued by a central bank; not widely accepted as medium of exchange).
- Functional equivalence and differences between currency and transferable deposits:
  - Similarities (both part of broad money):
    - Medium of exchange; immediately exchangeable on demand at par.
    - Can be legal tender (depending on legal framework).
    - Fixed nominal face values; divisible; no maturity; immediate accessibility.
    - No or very low transaction costs; earn no or low interest.
  - Accounting mechanics when central bank places currency into circulation:
    - Central bank reduces transferable deposits of the commercial bank and increases currency in circulation.
    - Commercial bank increases domestic currency and decreases transferable deposits at the central bank.
    - Currency only becomes part of broad money when bank clients exchange deposits for currency (currency outside banks).
  - Differences:
    - Currency can become physically obsolete (wear); transferable deposits do not.
    - Currency payments are anonymous; transferable deposits are personified and traceable.
    - Currency prone to counterfeiting; transferable deposits are not.
    - Transferable deposits imply transaction records available to issuing banks and, via law, to tax and law enforcement authorities—raising privacy concerns.

### MACRO-ANALYTICS OF DE-CASHING — Macroeconomic Framework
- Analytical approach: use the System of National Accounts (SNA) framework to subdivide the economy into five sectors: households, enterprises, financial intermediaries, the government, and the rest of the world.
- Core national accounting identities (simplified exposition):
  - Supply of resources = domestic output Y and imports IM.
  - Uses of resources = private and public consumption C, investment I, and exports X. (Equation labeled (1) in source.)
  - By expenditure approach, income generated by output equals sum of final uses. (Equation labeled (2).)
  - Income not consumed equals saving S; difference between exports and imports equals current account CA. (Equation labeled (3).)
  - Ex post, saving minus investment equals the current account balance (saving-investment balance = current account). (Equation labeled (4).)
- Implications:
  - Current account deficit arises when investment exceeds saving and must be financed from abroad.
  - Current account surplus occurs when saving exceeds investment and can finance investment abroad.
  - The saving-investment/current account identity is the fundamental identity of international macroeconomics and serves as the prism for tracing de-cashing effects across sectors.

*Source: wp1771 - 1. De-Cashing: The Macroeconomic Framework*

### 21. The outcome of the saving and investment balance depends on the performance

### 21. The outcome of the saving and investment balance depends on the performance

### Saving–Investment Framework and Accounting Identities
- National saving = government saving Sg + private saving Sp; national investment = government investment Ig + private investment Ip (5).
- Current account balance CA plus financial account balance FA should equal the change in international reserves R (6): CA + FA = -R (6).
- If private sector adjusts to equilibrium (Sp − Ip = 0), the government saving–investment balance (Sg − Ig) is the sole determinant of the current account.
- Fiscal balance B = Rev − Exp and is financed from external sources Ext or domestic sources Dm (7).
- Revenue: Tx = Td + Ti; NTx = Fs + Oth (8)(9).
- Current account typically determined mainly by trade balance X − Im, with contributions from net factor income NF and net transfers NT. Financial account flows can include FDI, portfolio investment PI, and other flows Oth (10).

### Monetary Accounts, Broad Money, and Reserves
- Change in reserves R (assumed equal to central bank NFA with no changes in commercial banks’ NFA) plus changes in net domestic assets NDA determine changes in broad money M (11): R + NDA = M (11).
- NDA drivers: net credit to government Cg, credit to private sector Cp, and other items net OIN.
- Money of external origin = NFA (reserves); money of domestic origin = NDA (domestic credit).
- Unless sterilized, accumulation of international reserves increases broad money for a given level of domestic credit; excess reserves or domestic credit expansion can spur inflationary pressure.

### Exchange Rate Linkages
- Exchange rate level reflects supply and demand for currency between domestic residents and the rest of the world.
- Flows affecting exchange rate include:
  - Current account transactions (exporters selling foreign currency; importers buying foreign currency).
  - Financial account transactions (residents buying foreign currency to invest abroad; non-residents needing local currency to invest domestically).
  - Transactions with international reserves (central bank interventions).
- All three key BOP accounts—current account, financial account, and international reserves—impact the exchange rate (12).

### How De-Cashing Enters the Framework
- Commitments to de-cashing directly affect the saving–investment balance via variables in the real, fiscal, external, and monetary sectors (variables shown in red in Figure 1).
- Real sector: de-cashing shifts means of payment from paper currency to electronic means, affecting private consumption and private investment.
- Fiscal sector: de-cashing affects seigniorage (non-tax revenue) and reduces currency printing and transaction costs (expenditure side).
- External sector: private saving–investment interplay may affect the current account.
- Monetary sector: assets side — credit to the private sector will need to be de-cashed; liabilities side — reserve money composition shifts from currency toward deposits.

### Monetary Effects of De-Cashing
- Primary impulse: drop in demand for currency; central bank rebalances liabilities between currency and transferable deposits with no net impact on money supply if offset fully by increased transferable deposits (Figure 2).
- On assets side, net foreign assets (money of external origin) are unaffected; some rebalancing between net claims on government and private sector possible.
- In scenarios where public sector reduces currency demand more than private sector (e.g., paying public salaries and taxes cashless), the rebalancing is mechanical and money supply impact is neutral.
- Currency demand should explicitly incorporate de-cashing incentives when modeled (ECM with cointegration between currency holdings, GDP, interest rates).
  - Additional variables: number of ATMs, fund transfer terminals, bank branches per capita, ratio of self-employment to total employment, projected share of salaries paid in cash, implicit opportunity cost of holding cash, number of checking and other transferable accounts.
- Transmission mechanism improvements:
  - De-cashing may make monetary policy transmission easier as fewer non-interest-bearing cash holdings lead to faster reaction of money market, interbank, bank deposit, and lending rates to policy rate changes.
  - Negative interest rate policy becomes more feasible if cash savings are discouraged; with de-cashing most money stored in banks and affected by negative rates to encourage spending.
  - Caveat: in economies with large cash shares, even small negative rates could trigger sudden jumps in cash demand and require increased cash supply; eliminating cash and prepaid cards would be controversial and may not fully prevent asset switching (other countries’ currencies, virtual currencies, gold, real estate).
- Banking implications:
  - Fresh deposits from de-cashing can boost lending where depositor base is weak, potentially lowering lending rates and increasing borrowing and growth.
  - Constraints remain: zero lower bound, excess liquidity, capital requirements, and sound lending standards.
- Early-warning signal loss:
  - Demand for cash can predict financial crises (e.g., September 2008 surge in cash demand). Full de-cashing might remove this signal, though agents could switch to other safe stores (gold, other currencies), which could still function as indicators.
- Central bank independence and seigniorage:
  - De-cashing reduces seigniorage revenue and currency issuance costs; however, for many central banks seigniorage is not a significant revenue source and often transferred to the general budget.
  - Seigniorage from high denomination notes does not exceed 0.1 percent of GDP in the USA, the Eurozone, Japan, the UK, and Switzerland (Sands, 2016).
  - Central banks also earn income on foreign reserves, government securities, revaluation of assets (including gold), and have limited profit distribution arrangements with sovereigns to safeguard independence.
  - In numerous emerging markets seigniorage is more important for central bank financial independence; de-cashing would dramatically reduce printing/minting/retiring costs.

### Real Effects of De-Cashing
- Growth impacts can be positive and negative.
  - Positive: reduced transaction costs estimated at about 2-2.5 percent of GDP (Bundesbank, 2014) could raise profits, investment, and growth; reduction in underground/grey economy could increase officially measured GDP.
  - Negative: private investment activities settled in cash (house construction, remodeling, remittance-financed activities) may be disrupted; elimination of high denomination notes could force use of more lower denomination notes increasing transaction costs; forced de-cashing without public support could cause social unrest and GDP losses.
- Sectoral impacts:
  - Supply side decomposition: value added plus taxes less subsidies on products across primary (mining, agriculture), secondary (manufacturing), and tertiary (services) sectors (Figure 3).
  - Cash use is typically higher in the private sector, implying greater effects in tertiary sector and secondary sector where private role is large; marginal impact on natural resources (public ownership).
- Demand side:
  - De-cashing affects private consumption and private investment; private consumption is sensitive to net disposable income and precautionary cash holdings.
  - Private consumption is a significant GDP component and may be conducted substantially in paper currency; de-cashing may temporarily hamper consumption and investment.
  - Public consumption and investment (usually non-cash transactions) likely less affected.

*Source: wp1771 - 21. The outcome of the saving and investment balance depends on the performance*

### 36. De-cashing will have an impact on the fiscal balance of the de-cashing country.

### 36. De-cashing will have an impact on the fiscal balance of the de-cashing country.

### Fiscal channel and mechanisms
- Fiscal balance is directly linked to the public sector saving-investment balance; changes in government revenue and consumption from de-cashing translate into changes in government saving and the current account (given unchanged public investment and private saving-investment balance).
- The direction of the fiscal shift depends on whether de-cashing improves the overall fiscal balance or causes deterioration; outcome hinges on relative impacts on specific revenue and expenditure lines (Figure 4 highlights primary affected items).

### Effects on tax collection
- Principle: de-cashing should improve tax collection by reducing tax evasion because electronic transactions leave verifiable trails.
- Empirical examples:
  - Sweden: benefited from more efficient tax collection with de-cashing.
  - Greece and Italy: heavy cash use contributes to persistent tax evasion.
- Evidence and caveats:
  - Electronic tax payments are widely used as a tax-control instrument, but they impose compliance costs (taxpayers must acquire/install electronic payment systems).
  - Recent studies: electronic payments did not appear to influence VAT collection, while negative effects of cash collection on VAT performance are unambiguous in countries where electronic cash payments are well-established (Bundesbank 2014).
  - Electronic payments may enable new evasion forms and incentivize barter, which could hamper tax collection.

### Magnitude of potential tax revenue gains (illustrative figures)
- U.S. tax gap (IRS estimate): US$ 458 bn average in 2008-2010; major components: underreporting of individual income tax US$ 264 bn and employment tax US$ 84 bn.
  - Illustration: if eliminating US$100 bills led to collection of 10 percent of this gap, additional tax contribution would be US$ 35 bn a year.
- European Union tax evasion estimate: €1 trillion a year (EU, 2017).
  - Illustration: elimination of large denomination Euro and pound bills could recover €100 bn in tax arrears under similar assumptions.
- Developing countries: additional tax revenue hard to estimate due to paucity of tax compliance gap analysis.

### Interest expenditure and seigniorage
- Central bank currency issuance interactions:
  - Central banks typically put currency into circulation by purchasing government bonds on the secondary market; this can increase bond demand and lower government interest rates.
  - Governments pay interest to central banks on these bonds; these payments are seigniorage transfers and can be substantial.
- Illustrative seigniorage figures:
  - United States FY 2017 seigniorage: 0.46 per one dollar issued (US Mint, 2017); seigniorage payments amount to about US$ 70 billion a year.
  - Sweden: seigniorage represents 1.1 percent of the central bank’s balance sheet (The Riksbank, 2015).
- Net effect on consolidated public sector balance unclear because interest payments are transfers between central bank and ministry of finance.

### Non-tax revenue effects (profit on currency issuance)
- Government revenue from currency issuance equals nominal value less acquisition/distribution/maintenance costs.
- If nominal currency issued declines with de-cashing, government non-tax revenue from currency issuance would decline.

### Budgetary and transition costs
- De-cashing typically requires deep institutional and legislative reforms, technical complexity, personnel training, procurement of equipment/technology, regulatory redrafting, and enforcement capacity strengthening.
- Potential affected expenditure items: wages and salaries (hiring/training), procurement of goods and services, investment in electronic payment infrastructure.
- Financing options: domestic financing or external support (loans recorded as financing or grants included in revenue).

### Net fiscal implications (ambiguous)
- Revenue side:
  - Tax revenue most likely to increase due to better collection.
  - Non-tax revenue most likely to drop with lower profit transfers from seigniorage.
- Expenditure side:
  - Interest expenditure paid to central bank on government bonds likely lower.
  - Additional transition-period expenditure likely to increase wages, goods and services, and capital procurement.
- Prolonged transition periods could smooth negative impacts as increased tax collection offsets some losses.

### Balance of payments effects
- De-cashing impact on most BOP flows likely marginal, especially for small to medium-sized countries; primarily a domestic operation.
- Current account: affected mainly via the government saving-investment balance.
  - If fiscal balance improves (tax gains > non-tax losses and transition costs), current account should improve—mainly via stronger exports reflecting government investment in infrastructure, competitiveness, and business environment.
  - If de-cashing requires additional imports of equipment/technology, current account may temporarily worsen.
- Cross-border payments and income transfers:
  - Distributed ledger-like technology (e.g., Bitcoin) can dramatically reduce international transfer costs; remittance costs: about 8 percent via traditional channels vs about 1 percent with electronic money (Goldman Sachs, 2014).
  - Blockchain-based remittance intermediaries already operate in some economies (Philippines, Kenya) offering Bitcoin-mediated transfers with conversion back into fiat.
- Loss of international seigniorage/foreign-held currency benefits:
  - Large holdings of U.S. currency outside the United States effectively represent a roughly $500 billion zero-interest loan to America; estimated worth around $20 billion a year, or roughly 0.15 percent of GDP (Krugman, 2013).

### Structural and social effects
- Financial inclusiveness:
  - Shift to transferable deposits requires consumers to have debit accounts; small businesses accepting bank money can increase profits via accessible payment means (debit cards, tele-payments).
  - But poorest populations without access to computers/mobile phones risk losing cash as a primary savings medium.
- Migration and labor market:
  - Reduced cash can lower illegal migration by removing cash payment options that attract informal labor.
- Environmental effects:
  - Polymer banknotes (used in over 20 countries) lead to a 32 percent reduction in global warming potential and a 30 percent reduction in primary energy demand compared with paper (Wang, 2016).
  - Transferable deposits outperform both paper and polymer currency environmentally as they require no production/disposal.
- Social implications and rights:
  - Carrying cash is framed as a human right in some constitutions; de-cashing may be perceived as violating freedom of contract and ownership.
  - Electronic funds are vulnerable to hacking; electronic fraud cases have more than doubled in the past decade.
  - De-cashing removes tacit forms of social support: informal, cash-based microentrepreneurship and forgone tax payments that act as implicit social assistance would be eliminated and require replacement by formal social protections.
  - Currency substitution risk: inadequate domestic currency availability during de-cashing could prompt use of foreign or surrogate currencies for opaque transactions.

### Conclusions and policy options (key recommendations and trade-offs)
- De-cashing is a long-term project; complete cashlessness should be phased.
  - Initial steps: phase out large denomination bills, ceilings on cash transactions, reporting of cross-border cash movements.
  - Further steps: economic incentives to reduce cash use, simplify opening/use of transferable deposits, further computerize the financial system.
- Prefer private-sector-led de-cashing over public-sector-led:
  - Private-led change is largely benign and market-driven; public-led mandates risk strong objections.
  - Avoid imposing de-cashing by decree; pursue targeted outreach to reduce public suspicion (concerns about state control of money use or forced bank savings).
  - Base de-cashing on individual consumer choice and cost-benefit considerations.
- Net macroeconomic impact likely positive, but contingent on balancing costs and benefits:
  - Benefits: raise recorded GDP growth (lower transaction costs, formalization of informal economy), expand tax base, reduce interest payments, improve monetary policy transmission, expand deposit base and credit, improve current account via public-sector balance and cheaper remittances, enhance financial inclusiveness, reduce central bank currency production costs.
  - Costs/risks: temporary frictions across sectors (disruptions in cash-heavy consumption and investment, social tensions), substantial fiscal transition costs, potential loss of seigniorage and central bank indicators, possible exclusion of poorest without digital access, temporary current account deterioration from capital imports for de-cashing, social strains among digitally inexperienced populations, elimination of tacit social protections requiring formal replacements, and risk of currency substitution.

*Source: IMF staff presentation and analysis as provided in the source PDF.*

### 56. Coordinated efforts on de-cashing could help enhance its positive effects and

### 56. Coordinated efforts on de-cashing could help enhance its positive effects and reduce potential costs

### Key findings and policy recommendations
- At least at the level of major countries and their currencies, the authorities could coordinate their de-cashing efforts.
- Coordinated efforts are, in particular, important in the decisions to phase out large denomination bills for all major currencies, to use ceilings and other restrictions on cash transactions, and to introduce the reporting requirements for cash transactions or their taxation.
- For currency areas, a single de-cashing policy would be clearly preferable to a national one.
- Consensus between the public and the private sector and outreach on the advantages and modalities of gradual de-cashing should be viewed as key preconditions for its success.

### Implementation considerations
- Phase-out decisions for large denomination bills should be coordinated across major currencies to enhance positive effects and reduce cross-border arbitrage or unintended spillovers.
- Use of ceilings and other restrictions on cash transactions can be combined with reporting requirements or taxation of cash transactions.
- A unified policy for currency areas is preferable to divergent national approaches within the same currency union.
- Public–private consensus building and outreach on gradual de-cashing modalities are essential preconditions to ensure acceptance and effectiveness.

### References
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*IMF Working Paper excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp1771.pdf_