Central Banking

RBA paper investigates post-crisis leap in currency demand

Despite government deposit guarantee, demand for Australian banknotes increased by 12% following Lehman Brothers collapse
reserve-bank-of-australia

A research discussion paper, published by the Reserve Bank of Australia today, investigates why the demand for currency "increased abnormally quickly" following the collapse of Lehman Brothers in 2008.

By the end of the year, an additional A$5 billion worth of banknotes ($5.21 billion) – 12% of the banknotes in the system at the time – was on issue, the paper says.

The authors, Tom Cusbert and Thomas Rohling, say up to 80% of the increased demand may reflect an increase in precautionary holdings by people concerned about the liquidity or solvency of financial institutions.

Prior to the rise, the Australian federal government introduced a deposit guarantee, which the authors say makes the jump in currency demand all the more surprising. Perhaps, the authors say, the public was reacting to the same signals as the policy-makers, or the guarantee simply was not enough to assuage concerns.

Click here to read the paper.

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