Precautionary cash holdings by European firms linked to firm size

The study, based on a unique ECB survey on cash usage during the COVID-19 pandemic, provides empirical evidence on money demand by European non-financial corporations.

Researchers found that cash holdings are inversely related to firm size, indicating that Small and Medium Enterprises (SMEs) tend to store more cash relative to their larger counterparts.

This finding suggests a precautionary motive, particularly for SMEs which are often more financially constrained, especially during crisis periods.

The survey also documented statistically significant larger average cash holdings in cash-intensive sectors, such as hotels, and in 'cash-friendly' countries like Austria.

These insights highlight the varied liquidity management strategies across the European corporate landscape, influenced by both firm-specific characteristics and broader economic environments.

The analysis contributes to understanding corporate financial resilience during stress periods.

The paper emphasizes cash's store-of-value function for European firms, particularly in low interest rate and low inflation environments, acting as insurance during crises against credit supply shocks.

These findings are crucial for the ongoing debate on Central Bank Digital Currency (CBDC) design, offering insights into calibrating holding limits for businesses.

The research also contributes to the literature on monetary policy transmission and the effective lower bound, highlighting cash's dual role: constraining policy while serving as a vital store of value for corporate liquidity management.

The study's focus on physical currency provides a specific lens into this critical function.