Cash Money as a Saving Mode

Research output: Working paper

Abstract

Cash money can be a rational devise of saving as an insurance against external uncertainty. Liquid money, controlled by a stable and trustworthy central bank, offers an insurance against stock market crashes, bankrupts and other economic turmoils that endanger the yield of illiquid saving modes. In turbulent times, the value-carrying property of money is accentuated, and the recent dark episodes including the last financial crisis, the pandemic and the war in Ukraine have made the public in Europe respond to uncertainty by increasing their cash holdings. The paper constructs a simple life cycle framework for the analysis of rational and irrational motives to save money, answers to questions about the effects of saving liquid money on illiquid saving and education and examines the inherent cost of the use of cash as a saving mode. The main findings of the paper are the following. The insurance motive to save money increases total savings by replacing deposit saving more than one-to-one. The share of deposit savings depends positively on the expected interest rate, while the share of cash savings is the higher the less there is inflation. Deposit saving correlates positively and education negatively with the expected market interest rate thus affecting their relative proportion, but education does not affect the implicit price paid for cash insurance. Incorporating money illusion adds an internal bias to life-time optimization. Misjudgment of the inflation rate makes consumers save excessively in cash at the cost of market deposits and increases the cost of using cash as rational insurance against external uncertainty.
Original languageEnglish
Number of pages17
ISBN (Electronic)978-952-03-2528-2
Publication statusPublished - 2022
Publication typeD4 Published development or research report or study

Publication series

NameTampere Economic Working Papers
No.135
ISSN (Electronic)1458-1191

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