Cash cycle functioning: a supply side perspective.

Most economic literature considers money demand models based on agents’ need to execute transactions and to hold stocks for precautionary and/or speculative purposes. In the euro area the theory has subsequently been applied to payment instruments. In particular, as far as banknotes are concerned, the available studies, in addition to having discussed the role of the variables traditionally determining demand, have highlighted a possible paradox consisting in the continuous growth of the cumulative net issuance of Central Banks even in the presence of a decline in cash transactions. The conclusions reached by this theoretical corpus neglects, however, the concrete functioning of the “cash cycle”, i.e. the complex of actors, the so-called cash handlers, and the distribution channels through which banknotes are issued, enter circulation and are used by operators for the purposes identified by monetary theory. In other words, the supply side of cash does not appear to have received comparable attention to the demand side. The paper describes the actual functioning of the “cash cycle” showing the condition under which cash provision could be disrupted even in presence of demand. Second, the study discusses how cash handler’s distribution choices on supply channels can determine the polarization of market demand for cash over a subset of denominations thus leading to Pareto Optimality issues.