Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
The newly independent republics of the former Soviet Union and the Baltics faced shortages of banknotes, starting in 1992 until the introduction of separate currencies by the republics. Prolonged cash shortages are historically rare, and seem to be associated with the break-up of federal states. This paper analyzes the causes and consequences of the cash shortage in the former Soviet Union.
The cash shortage is documented through reports of restrictions on access to cash from banks; the emergence of different exchange rates for deposit rubles from different republics; and faster inflation of prices of goods that could be paid for in deposit rubles. Evidence is presented that real cash balances fell precipitously in the former Soviet Union, especially in the non-Russian republics.
A monetary union is modeled in which every member has unlimited capacity to create deposit money but only one member (for example, the Russian Federation) is capable of producing cash rubles, while the payment technology requires that cash be used to make retail purchases, as in the former Soviet Union. Under such an asymmetric monetary union, cash shortage is an equilibrium outcome. Inflation will be high, but not as high as in a monetary union without any constraints on cash creation by any member. Creating a cash shortage can be beneficial for the issuing country and disadvantageous for the other members of the union, who therefore have an incentive to introduce their own currencies. In the absence of countervailing forces, the asymmetric monetary union may be unstable.
The paper uses a cash-in-advance model to demonstrate how a rise in real interest rates can reduce demand for cash until it matches supply. Otherwise, quantitative rationing of cash or deviations from a one-for-one exchange rate between cash and deposits will be needed. The last two mechanisms may induce the diversion of resources out of the more productive sector and depress current consumption still further.