Demand for Money and Circulation of Large Face Value Banknotes: Current Trends

Central banks around the world issue banknotes of large face value in response to demand from the public. Understanding of the nature of the cash need in the context of banknotes gradation is very important for predicting their effective emission, not allowing banknotes excess or deficit. Therefore, the aim of this work is to identify the main monetary and non-monetary factors in formation of demand for large face value banknotes, based on the study of the global experience in optimization of the cash circulation structure. The analysis is based on a comparison of the conversion rates of large banknotes in different countries and the factors affecting them. It has been revealed that in countries with high level of economy large banknotes are used to a greater extent as a means of savings, which increases in the period of almost zero interest rates, compared to other countries with less stable currencies, where central banks support higher interest rates. For countries with depreciation of national currency consistent increase in the face value of the largest banknote is typical, while demand on small face value decreases. In the history of monetary circulation reforms in some countries there have been cases of sudden cancellation or replacement of large face values in order to force people to withdraw cash from their stocks, as well as to confiscate illegal wealth. Waiting for such actions from government can distort the demand in cash. The attribution of the national currency to the list of world reserve currencies also stimulates the demand for banknotes of large face value, in particular because such currencies are in use in other countries along with local currencies and are used not only for saving as a “stronger” currency, but also for payments and settlements in large transactions, especially in the shadow economy. Optimization of the cash structure can significantly reduce the costs of circulation. The state can stimulate or weaken the demand for large face values. The fight against corruption with established barriers to illegal trade and trafficking justifies the efforts of some jurisdictions to remove very large banknotes from circulation. At the same time, it is extremely important to ensure transparency and timely notification of the public of making such decisions.