Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma

Feige, Edgar L. (1989): Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma.

Abstract

This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation and hence the currency velocity (turnovers per year) of each denomination. The velocity of currency times the stock of currency produces estimates of the annual volume of cash payments. Since the volume of check payments (debits to checkable accounts) is regularly recorded, our estimates of cash payments can be used to estimate the total volume of transactions (MV) from the payment side of Fisher’s equation of exchange. The paper goes on to examine the “currency enigma” from the perspective of both “missing currency” and “missing payments”. The estimated volume of cash payments is so high when compared to personal consumption expenditures, that one is led to the conclusion that a large fraction of the US currency supply is held abroad, and that there is a sizable underground (unreported and perhaps unrecorded) economy in the United States.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency; Currency Velocity; Cash payments; transactions; Underground economy; Currency turnover; Counterfeit currency; Currency enigma
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy; E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth ; Environmental Accounts; J - Labor and Demographic Economics > J1 - Demographic Economics > J11 - Demographic Trends, Macroeconomic Effects, and Forecasts; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

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