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Sectoral holdings of notes and coins in the UK: The effect of the crisis commencing in 2007

Lookup NU author(s): Dr David Barlow



This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License (CC BY-NC 4.0).


One consequence of the recent global financial and economic crisis for the UK has been that the share of M1 held as notes has increased, contrary to the trend since the mid-1970s. To investigate this, error feedback equations for the holdings of notes and coins by UK households and by UK non-financial corporations are initially estimated for the period up to 2007Q2 (the quarter prior to the rescue of Northern Rock). The cointegrating relationships yield an income elasticity of near to unit with plausible interest (semi) elasticity. When the functional form for the interest rate is semi-log the equations are found to be stable when the period is extended to include the period since the near collapse of Northern Rock (2007Q3 to 2012Q4). But for the double log specification (constant interest rate elasticity) there is evidence of instability, in particular a considerable reduction in the rate at which money balances return to equilibrium. Overall the evidence suggests that if we allow for the non-constant interest rate elasticity the behaviour of the holdings of notes can largely be explained by the extraordinarily low interest rates. Inspection of the components of M1 reveals that the impact of the crisis is much more pronounced for bank deposits than for notes. This effect is particularly strong in the household sector for which there has been a large fall in holdings of interest bearing sight deposits and a rise in non-interest bearing sight deposits greater than the increase in holdings of notes and coins.

Publication metadata

Author(s): Barlow D

Publication type: Book Chapter

Publication status: Published

Book Title: International Cash Conference 2014: The usage, costs and benefits of cash - revisited

Year: 2014

Pages: 223-239

Print publication date: 01/12/2014

Acceptance date: 01/01/1900

Publisher: Deutsche Bundesbank, Eurosystem

Place Published: Dresden, Germany


Library holdings: Search Newcastle University Library for this item

ISBN: 9783957290984