THE DEMAND FOR CURRENCY IN MALTA

Aaron George GRECH

doi:10.14505/tpref.v5.2(8).04

Aaron George GRECH Modelling and Research Department, Central Bank of Malta, Malta

DOI: https://doi.org/10.14505/tpref.v5.2(8).04

Abstract

This article studies the demand for one particular component of the money stock, currency, in Malta in the light of the existing theoretical and empirical frameworks. In particular, it argues that the commonly applied analytical framework needs to be tweaked slightly for it to explain better the reasons underpinning the relatively high currency demand in Malta compared with other euro area countries. In particular, the presence of a large tourism sector is likely to be boosting demand beyond what one would expect. Similarly the presence of a significant shadow economy appears to be exerting some influence on the magnitude of currency holdings. That said, this study suggests that there is scope for a number of policies which could lead to lower demand for notes, particularly measures to facilitate the use of electronic means of payment and efforts to discourage the shadow economy.

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