Wednesday, April 04, 2007

The Growing Cash in Circulation

The amount of Drams in circulation in Armenia grew by some 46 percent in 2006, from 155 to 227 billion, repeating the growth pace of 2005 (also see my October 2006 post). Most noteworthy, the 50000 Dram note (about USD 125) experienced the fastest growth. It is almost ten times the amount in circulation in 2005, and grew from about one percent of the Drams in circulation to 7 percent.

Millions of Drams outside the Central Bank
Nomination.. 2001 .2002 .2003 ..2004 ..2005 ..2006
10000 drams...... ..... .7295 .25221 .42980 .79443
20000 drams 12351 24155 23042 .21017 .40196 .55515
50000 drams.. 780 .1607 .1386 ...945 ..1612 .15717 66693 92089 96838 105534 155275 226841

Drams per USD 555 ..573 ..579 ...533 ...458 ...416

The back to back growth in currency in circulation is phenomenal and may have significant implications for economic activity and its measurement. I am also very intrigued by the spike in the circulation of the 50000 Dram note. Do we know of any on going research on the causes and consequences of the observed trend?


Onnik Krikorian said...

Interestingly, I have only ever seen ONE 50,000 drams note, which is just as well because almost every normal shop complains if you hand over a 5,000 drams notes for goods. Forget even trying with a 10,000 or 20,000 drams.

Some times, shops even turn customers away because they can't supply change, or have to send someone out to somewhere else to get some.

So, if the increased number of 50,000 drams notes indicate greater economic activity, I can tell you for sure that its not among the majority of Armenians. I suspect that if you ask most of them, 99 percent wouldn't have seen a 50,000 drams note either.

nazarian said...

Onnik, I had similar experiences with 5,000 dram notes in 2003 in Vanadzor. I thought it was because of low economic activity in the provinces.

David, do you know how the Central bank has injected these extra dram notes into the economy without sparking an out of hand inflation? As far as I know, the CB has not been buying Armenian government /corporate bonds as there are none. That's the mechanism that the US Fed injects new money in the economy.

David said...

It does indicate an increase in economic activity. The bad news is that it also indicates that economic activity continues to be cash based to a large extent with adverse effects on financial intermediation so vital for economic growth. It may also have implications for the underground economy. But more research is needed here.

As for inflation, the "Equation of Exchange" sets the relationship between the money supply and economic activity: M.V=P.Q where M is money supply (currency and bank deposits), V its velocity (number of times a Dram changes hands), P price index, and Q real GDP. So increases in M do not automatically translate into price increases unless you hold V and Q constant (Quantity Theory of Money). Shushan illustrated in her August post how the money velocity has been declining over the years ( So M is increasing but at the same time V is declining.

Turning to the CBA monetary policy instruments, the CBA may buy and sell Armenian treasury bonds to regulate economic activity (similar to other central banks).

nazarian said...

I would have thought that the velocity would be going up as the confidence in dram strengthens and there are more ways of spending it instead of dram. But I just read Shushan's post and I too wonder what the reason may be. So I guess the decrease in V compensates the increase in Q leaving delta P in the acceptable 3-4% range.

David said...

This and other posts should make interesting topics for term papers and research. I would love to see these posted as working papers on!

Ara Khanjian said...

Hi David,

I adjusted the table and now it is easier to see the relevant numbers.

According to a publication of CBA called “Monetary Overview”, February 2007, section “main monetary indicators” the share of currency in circulation in Dram broad money consistently declined from 75% in 2002 to about 58% in February 2007, see the last figure on page 12 of the document and 5 in the web site.

This implies that deposits in Dram are increasing faster than Dram in circulation. This is good news, because it implies that financial intermediation is improving. Of course there is significant room for improvement, because in the U.S. currency in circulation is about 13% of the broad money, M2.

With respect to the large number of 50,000 bills, in the case of U.S. currency also the $100 bills represent the largest share of currency in circulation, about 72%!!! See table.

Go to:
Scroll down to: U.S. Currency and Coin Outstanding and in Circulation

Currency in circulation by denomination, 12-31-2006

$1 $9,049,316,340
$2 1,532,419,520
$5 10,492,843,480
$10 15,986,791,460
$20 119,219,518,240
$50 62,790,638,100
$100 564,112,426,800
$500 142,383,000
$1,000 165,675,000
$5,000 1,765,000
$10,000 3,460,000
Total currency $783,497,237,540

One explanation is that most of the U.S. currency is outside of the U.S. and it is more convenient to use $100 bills to move U.S. dollars around. Also it is true that the underground economy prefers to deal with $100 bills.