On the Welfare Effects of Phasing Out Paper Currency

This paper is one of the first to quantify the welfare effects of proposed cash suppression policies. We work within the context of a general equilibrium framework in which households face an endogenous cash-in-advance constraint and firms use cash transactions to evade taxes. Eliminating currency increases transactions costs and raises effective tax rates by curbing tax evasion. Our quantitative experiments imply that a total cash ban improves steady-state welfare, but only if paired with a revenue-neutral decrease in the tax rate on capital. We show in an extension with heterogeneous agents that curtailing cash harms frequent-cash users more than others. Such distributional effects of cash suppression may be a concern for policymakers.