Introduction

Demand for banknotes grew considerably over the COVID-19 pandemic interval in
many superior economies. In Australia, the worth of banknotes in circulation elevated by
22 per cent, or $19 billion, between March 2020 and its peak in December 2022. This
adopted a interval of already-strong banknote demand; within the decade previous to the pandemic, banknote demand
was rising sooner than GDP (Flannigan and Parsons 2018; Flannigan and Staib 2017). Banknote demand has
since declined however stays near its historic excessive. This power, relative to development in costs and
the economic system, is regardless of the continued decline in using money for day-to-day transactions over many
years (Mulqueeney and Livermore 2023). The dichotomy of robust banknote demand alongside falling
transactional use suggests banknotes are being hoarded, seemingly for store-of wealth or precautionary
financial savings functions.

Adjustments within the denominational mixture of banknotes which are on challenge can present perception into the diverging
traits of decrease transactional versus increased hoarding demand for banknotes. Progress in low-denomination
banknotes ($5, $10 and $20) has been gradual, rising at round 1 per cent annualised on a
per capita foundation since 2007 (Graph 1). Low denominations are sometimes used for in-person
transactions and for retailers to offer change, so subdued demand for these banknotes signifies a
diminished use of money for client spending. Against this, demand for high-denomination banknotes
($50 and $100) has been robust and the important thing driver of development in general banknote demand; excessive
denominations have grown by virtually 5 per cent on an annualised per capita foundation since 2007.
That is per an elevated need locally to carry banknotes as a precaution or
store-of-wealth, particularly throughout occasions of financial uncertainty (Guttmann et al 2021).

This text quantifies the sources of demand for Australian banknotes to additional perceive the
variations in transactional and hoarding demand, notably for the reason that pandemic. In doing so, we replace
estimates from Finlay, Staib and Wakefield (2018)
to June 2023. Understanding the relative significance of every supply
of demand can help the Reserve Financial institution in forming expectations about seemingly future developments in
banknote demand, which is a key a part of figuring out the Financial institution’s annual banknote print orders. It may well
additionally help in policymaking relating to money entry and distribution and contributes to our understanding
of the amount of money utilized in Australia’s shadow economic system.

At a single level of time, banknotes in circulation will fall into one of many following classes:

• Banknotes which are used to facilitate professional day-to-day transactions in
  Australia.
• Banknotes which have been misplaced or destroyed.
• Banknotes which are used within the shadow economic system (both to hide authorized transactions
  to keep away from tax, to pay for unlawful items and providers or to retailer wealth generated by the sale of
  unlawful items and providers).
• Banknotes which are hoarded – that’s, held, both domestically or abroad,
  as a store-of-value, for emergency liquidity or for different such functions.

Whereas particular person banknotes on challenge transfer between these classes every single day, the share of banknotes
attributed to every class is prone to be comparatively secure over the quick run. Nevertheless, it’s
necessary to acknowledge that money is an nameless bearer instrument and so tough to hint and
analyse. To beat this, the place doable, we use a wide range of methods to estimate the share of
banknotes attributed to every class, thereby producing a variety of estimates somewhat than a single
level estimate. Every estimation method naturally depends on a variety of assumptions, a few of which
are extra sensible than others. Whereas we can’t be definitive or actual about how banknotes are used
within the economic system, our confidence in broad traits is strengthened if we see related outcomes rising
throughout the assorted methods.

Banknotes used for professional transactions

Australians sometimes use money to finish on a regular basis transactions, resembling on the grocery retailer. This
supply of banknote demand – which we name ‘transactional demand’ – is tough to
estimate because the Financial institution doesn’t observe banknotes as soon as issued into circulation. So, whereas we can not instantly
observe or measure transactional demand, we use 4 totally different strategies to approximate its dimension to acquire
a variety of estimates, primarily based on Finlay, Staib and Wakefield (2018):

1. the counting technique
2. the speed technique
3. the banknote processing technique
4. the seasonality technique.

Every of those strategies is mentioned in flip, earlier than a closing evaluation on the proportion of banknotes used
for professional transactions is made primarily based on all these approaches.

Counting technique

The primary method estimates the inventory of money throughout six bodily areas which are generally used to
alternate or retailer money for transactional functions (Desk 1). We mixture these areas to kind an
economy-wide estimate of how a lot money is used for professional transactions. Whereas this method is a
helpful and tangible technique to estimate this inventory, it depends on a number of assumptions and doesn’t account
for any money not captured in these classes.

We estimate the inventory of money held in every of those areas by:

1. estimating the variety of a given location (e.g. the variety of tills and self-checkouts) and
   multiplying it by a median quantity held per location (e.g. the amount of money held in every until or
   self-checkout)
2. changing circulation information to a inventory by making assumptions in regards to the velocity of money (the variety of occasions
   a banknote is utilized in a given interval) by a specific location.

The counting technique means that the transactional inventory of money fell from round $15 billion in
March 2020 to only under $14 billion on the finish of June 2023 (Graph 2). Over the primary
18 months of the pandemic, the transactional inventory fell to $12 billion; whereas it has picked up
barely over the previous two years, it stays round $1 billion under its pre-pandemic peak. The
estimated fall was primarily as a result of massive declines within the money holdings of monetary establishments and
unbanked enterprise takings. This was partly offset by modest will increase in pockets holdings, tills and
self-checkouts, gaming machines and vacationer money holdings.

The decline in transactional demand has occurred alongside a major improve within the worth of
banknotes on challenge. As a share of banknotes on challenge, the transactional inventory has fallen by round
4 proportion factors for the reason that pandemic to round 13 per cent.

Velocity technique

A single banknote can be utilized for a lot of transactions, so one other strategy to approximate the inventory of money used
for transactions is to estimate the circulation of money funds and convert this circulation right into a inventory. The 2
ideas are outlined within the following equation:

$\mathrm{Worth of transactional inventory}$
$=\mathrm{Worth of money funds}$
$÷\mathrm{Velocity of transactional inventory}$

The home circulation of money funds is estimated by multiplying the worth of whole card funds from the
Financial institution’s Retail Fee Statistics by the cash-to-card cost ratio recorded within the Financial institution’s
Shopper Funds Survey (CPS) (Graph 3, prime and center panels). Money funds made with money
sourced abroad is approximated by subtracting the worth of card funds and ATM withdrawals made with
a global card in Australia from whole vacationer spending estimates from the Australian Bureau of
Statistics (ABS) and Tourism Analysis Australia. By this technique, we estimate that money facilitated
round $8 billion price of transactions in June 2023 – a decline of round
70 per cent since its peak in December 2008 (Graph 3, backside panel). Money has been used
a lot much less ceaselessly for the reason that pandemic; our estimates counsel that month-to-month money funds have fallen by
round $1 billion.

We then estimate the speed of transactional money, which is the variety of occasions the transactional inventory
is used to make a cost in a month. That is approximated by mapping out money actions by the money
cycle. Banknotes begin at a money depot and are transported to an ATM or financial institution department, earlier than finally
ending up in a client’s pockets or purse. Subsequent, shoppers spend these banknotes at a enterprise
earlier than they’re returned to a money depot or financial institution department and start the cycle once more. We calculate the
common variety of days it takes for money to move by a degree within the money cycle. For some legs of this
journey we have now correct information, such because the variety of banknotes coming into and leaving money depots every day,
and so can calculate the common time a banknote spends in a depot. For different elements we have to use
judgement.

We estimate that the speed of money has steadily declined since 2008 and fell sharply following the
onset of the pandemic; lockdowns throughout Australia and the restricted potential to spend money had been key drivers
of this fall. Our estimates counsel that it takes virtually six weeks for all the transactional inventory of
money to show over; that’s, the transactional velocity of money is round 0.7 when measured on a
turnover-per-month foundation (Graph 4, prime panel). Combining these two elements means that the
transactional inventory of money was within the vary of $9–12 billion on the finish of June 2023, or
9–12 per cent of all banknotes on challenge (Graph 4,
backside panel). This technique means that since March 2020, the transactional inventory has fallen by round
$1.5 billion, or 4 proportion factors, which is per outcomes from the counting technique
above.

Banknote processing technique

Our third method quantifies the transactional inventory of money by estimating the speed at which banknotes
move from retailers and banks to money depots. Since depots solely course of banknotes which are actively
circulating and don’t deal with banknotes which are hoarded or misplaced, it may be used to approximate the
transactional inventory of money.

The processing frequency of all denominations has declined over the previous decade, reflecting a shift in
client preferences away from utilizing money as a method of cost (Graph 5). The decline was
notably sharp over 2020 and has remained comparatively regular thereafter. The processing frequency of
$5 and $10 banknotes is low as retailers are inclined to hold these denominations as change, such that
they cycle by money depots much less ceaselessly. The $50 denomination processing frequency has
converged to that of the small denominations, which can counsel an rising use for hoarding relative
to transactional use.

We will then estimate the transactional inventory of money by making two assumptions. First, we assume the
non-transactional inventory of money consists solely of $50 and $100 banknotes, and so the decrease
denominations are solely used for transactional functions. Second, the processing frequency of the
transactional inventory of $50 and $100 banknotes is the same as the processing frequency of the
$20 denomination. Lastly, this method doesn’t account for money demand from the shadow economic system,
so we subtract estimates of the inventory of money used for that goal (mentioned additional under).

The processing technique means that round 26 per cent of banknotes in circulation had been used for
transactional functions in June 2023. Because the pandemic started, the transactional inventory of money has fallen
by 7 proportion factors based on this technique, which is a bit of bigger than different estimates.
Nevertheless, it’s seemingly that this technique overestimates transactional demand, because it depends on robust
assumptions about using every denomination. For instance, the upper denominations which are utilized in
transactions could also be processed extra typically than the $20 notice. Nearly all $50 and
$100 banknotes obtained by retailers are prone to be banked and returned to money depots, whereas the
$20 notice is extra prone to be given as change. This may end in increased transactional inventory
estimates.

Seasonality technique

The ultimate method for estimating the share of money utilized in transactions is the seasonality of banknote
demand technique. Demand for money shows a predictable (however weakening) seasonal sample, with a peak
round Christmas and a trough within the winter months. This mirrors the seasonality of client spending. As
such, we will estimate the transactional share of money by attributing all of the seasonality of banknote
demand to transactional functions. Non-transactional money demand is unlikely to exhibit a seasonal
sample.

To measure the seasonality of the transactional element of banknote demand, we use a proxy for money
spending – the worth of banknotes lodged in money depots every month. Banknote lodgements measure
money flowing from retailers into depots, which is a direct measure of money spending. As such, seasonality
current in banknote lodgements must also be current in money spending. We alter the seasonality of the
lodgement information with three estimates of the seasonality current within the velocity of transactional money, and
then common over the three estimates.

We estimate that 9–12 per cent of banknotes in circulation
had been used for professional transactional functions in June 2023 underneath this technique (Graph 6). Because the
pandemic started, the transactional share of banknotes on challenge declined by 2–3 proportion factors, which is rather less than the decline
prompt by different strategies. In worth phrases, round $9 billion of money was
used for transactions – a fall of $1 billion for the reason that pandemic started.

General evaluation

Taken collectively, these 4 strategies counsel that between 9 per cent and 26 per cent of
banknotes in circulation are used for professional transactions in Australia (Graph 7). On common
for the reason that pandemic started, the share of banknotes used for this goal has fallen by round
5 proportion factors, which is per the pre-pandemic pattern decline in money use. Though
every technique introduced above has limitations, the traits – and certainly the estimates from three of
the 4 estimation strategies – are broadly related.

Misplaced banknotes

There’ll inevitably be some banknotes which have been misplaced, destroyed, forgotten about or are sitting in
numismatic forex collections, each domestically and internationally. Whereas these are nonetheless thought of
as banknotes on challenge, they’re unavailable for spending. To estimate the worth of those ‘misplaced
banknotes’, we exploit the truth that some paper banknotes – which had been final issued within the
early to mid-Nineteen Nineties however are nonetheless authorized tender – have but to be returned to the Financial institution for
destruction. We assume that these excellent banknotes are misplaced, calculate an implied annual loss charge,
after which apply this charge to the quantity of excellent polymer banknotes. Notice that paper banknotes are
nonetheless being returned to the Financial institution, regardless of being changed by polymer banknotes greater than 25 years
in the past, and so our measure is inherently unsure.

The loss charge is best for the bottom denominations ($5 and $10), adopted by the best
denominations ($50 and $100) and is smallest for the center denomination ($20) (Graph 8). This
could also be as a result of folks exhibiting much less care in the direction of banknotes of decrease worth, whereas high-denomination
banknotes could also be hoarded and finally forgotten about or misplaced. Though the loss charge of paper
banknotes serves as an indicator for polymer banknotes, it is probably not an correct reflection. For
occasion, polymer banknotes are extra sturdy than paper banknotes, which means that fewer polymer
banknotes can be destroyed. However, better worldwide demand for Australian banknotes
over current many years could end in a better circulation of banknotes leaving the nation, a few of which can be
misplaced.

We use the minimal and most loss charges of the paper denomination to estimate a variety for the quantity of
misplaced banknotes. This means that $5–9 billion, or roughly 5–9 per cent of banknotes in circulation, had been misplaced,
destroyed, forgotten or sitting in numismatic forex collections as of June 2023. Unsurprisingly, the
share of banknotes which are misplaced has remained broadly unchanged in recent times and was not affected by
the pandemic.

Banknotes used within the shadow economic system

As bodily money is tough to hint, it may be used to facilitate exercise within the ‘shadow’
economic system. The ABS defines the shadow economic system as consisting of each underground manufacturing (concealing of
authorized actions to keep away from taxation) and unlawful manufacturing (resembling unlawful drug manufacturing and sale)
(ABS 2013). To estimate the inventory of banknotes used within the shadow economic system, we first estimate the dimensions of
the shadow economic system after which use the estimates of banknote velocity described above to transform this circulation
into the amount of money used to facilitate these transactions. For simplicity, we assume that every one shadow
economic system transactions are made with money.

Utilizing ABS estimates of the shadow economic system from 2012, and scaling it to newer GDP figures, we
estimate that the inventory of money utilized in underground manufacturing was $4.2 billion and the inventory of
money used on unlawful medicine was round $1.1 billion in June 2023. This means that the inventory of money
used to facilitate shadow economic system transactions was $5.3 billion, which is simply above
5 per cent of the entire banknotes on challenge at the moment. The Black Financial system Activity Drive estimates
that the dimensions of the shadow economic system is twice as massive as estimated by the ABS (BETF 2017). Utilizing this
information supply means that $10.5 billion of money, or round 10 per cent of banknotes on
challenge, is used to facilitate shadow economic system actions. Notice, these estimates assume that the share of
the economic system dedicated to underground and illicit actions, in addition to the proportion of such actions
which are facilitated by money, has remained unchanged over time.

We additionally calculate the inventory of money primarily based on estimates of the dimensions of the drug market. Expenditure on
medicine is calculated primarily based on information from the Australian Prison Intelligence Fee (ACIC) on the
quantity of medication consumed by way of wastewater evaluation and from the 2019 Australian Institute of Well being and
Welfare Nationwide Drug Technique Family Survey (ACIC 2023; AIHW 2020). These outcomes counsel that
$14.1 billion was spent on illicit medicine in 2022/23, so dividing by the
transactional velocity implies that the inventory of money used to facilitate purchases of illicit medicine was
$1.6 billion, or virtually 2 per cent of cash-in-circulation in June 2023. As well as, drug
suppliers are additionally prone to maintain massive volumes of money in reserve; ACIC (2022a) information counsel that this
is 2 per cent of whole gross sales. These outcomes counsel that whole money hoarding by the illicit
drug provide chain is as much as $800 million, which is as much as roughly 1 per cent of all
banknotes on challenge.

In sum, we estimate the inventory of money used within the shadow economic system in June 2023 was round
$7–11 billion, or 7–11 per cent of whole
banknotes in circulation. This has edged up barely for the reason that pandemic, though these estimates have a
excessive diploma of uncertainty.

Hoarding

Hoarding, each domestically and internationally, is essentially the most major factor of banknote demand.
Hoarding is often achieved for store-of-wealth or precautionary motives. We outline hoarded banknotes as
these held for professional causes apart from financing on a regular basis transactions or these which are misplaced.
Given the problem in quantifying the inventory of money that’s hoarded domestically or internationally, we
apply three strategies to instantly estimate the inventory of hoarded banknotes:

1. Utilizing fire-damaged banknote claims information from the Financial institution’s broken banknote facility means that
   2 per cent of banknotes in circulation had been hoarded domestically in June 2023.
2. Scaling money holdings information from the Financial institution’s 2022 CPS to economy-wide ranges estimates that 7–15 per cent of money in circulation was hoarded
   domestically in June 2023.
3. Aggregating wholesale forex shipments to and from Australia means that 0–20 per cent of money in circulation was prone to be
   hoarded internationally in June 2023.

Every of those approaches is inherently restricted: the primary method assumes that fire-damaged households
are consultant of all households throughout Australia; and the second method depends on respondents
precisely reporting the amount of money they retailer at house (respondents with massive bodily money holdings
could also be much less prone to take part within the survey or report the true worth of their holdings). The third
method is topic to important uncertainty and doesn’t seize all worldwide flows of Australian
banknotes.

Whereas these direct strategies counsel hoarded banknotes account for as much as 35 per cent of all
banknotes excellent, that is prone to be an underestimate. Alternatively, we will compute the share of
banknotes which are hoarded because the residual of different estimates mentioned above. Assuming there aren’t any
different areas that money may very well be, we take the residual of our transactional estimates and subtract the
inventory of money that’s misplaced and the inventory of money that’s used within the shadow economic system. This means that
roughly 55–80 per cent of banknotes in circulation in June
2023 had been hoarded, both domestically or internationally. That is nearer to worldwide estimates of
hoarding in Germany and the euro space, for instance (Bartzsch and Uhl 2017; Zamora-Pérez 2021). In worth
phrases, the hoarding element of banknote demand accounted for between $56 billion and
$81 billion. This share has grown for the reason that onset of the pandemic by round 5 proportion
factors, which signifies that a lot of the rise in banknote demand over this era was for hoarding
functions.

Conclusion

In opposition to the backdrop of declining money use for day-to-day transactions, it’s helpful to grasp how
banknote use has modified in recent times. We estimate that of all of the banknotes at present in circulation:

• 9–26 per cent are used for transactional functions
• 5–9 per cent are misplaced
• 7–11 per cent are used within the shadow economic system
• 55–80 per cent are hoarded domestically or internationally.

The estimated share of banknotes used for transactions has declined by round 5 proportion factors
for the reason that onset of the pandemic and is per the decline in money funds, as proven within the
Financial institution’s newest CPS. Non-transactional banknote demand, notably from hoarding, seems to have
pushed the numerous improve within the worth of banknotes on challenge for the reason that pandemic started
(Graph 9).

This evaluation permits us to attract some broader conclusions. First, declining transactional velocity of money
and an elevated share of banknotes which are hoarded signifies that most Australian banknotes could have a
longer lifespan in contrast with the previous. Second, fewer banknotes used for transactions will result in decrease
money processing volumes, which additional will increase monetary pressures throughout the wholesale banknote
distribution trade (RBA 2021). And at last, these outcomes present additional proof that the pandemic
has had an enduring impact on cost behaviour in Australia (Mulqueeney and Livermore 2023; Guttmann
et al 2021).

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