Inside the black box: tools for understanding cash circulation

In this study, we assess the main drivers of banknote circulation in Italy over the last decades by using a number of econometric tools proposed in the literature. We explore the role played by the banknote flows from abroad, changes in the institutional framework and disentangle domestic demand for transaction purposes from other components, including liquidity hoarding. We find that changes in legal limits on cash payment and money holdings for precautionary reasons explain the bulk of cash dynamics. Moreover, the share of transaction demand declined over time becoming of second-order. Finally, we find that, during the pandemic from Covid-19, the exceptional raise in cash circulation was mostly the result of an increase in precautionary demand due to both economic uncertainty and restrictions to mobility that resulted into a marked decline of lodgments to the central bank.