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Currency and Checking Deposits as Means of Payment

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  • Yiting Li

    (National Taiwan University)

Abstract

We consider a record keeping cost to distinguish checking deposits from currency in a model where means-of-payment decisions and liquidity of assets are modelled explicitly. An equilibrium exists where checks are used only in big transactions while cash is used in all transactions. Higher inflation or lower reserve requirements raise the deposit interest rate, lower the currency deposit ratio and thereby increase the money multiplier and money supply. Monetary policy has differential impacts on the terms of trade in transactions using different means of payment. During high inflation, individuals economize on the holdings of nominal assets and use checks more frequently, implying higher liquidity of M1. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.11.002
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 2 (April)
Pages: 403-417

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Handle: RePEc:red:issued:09-110

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Related research

Keywords: Currency; Deposits; Record keeping cost; Inflation; Reserve requirements;

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References

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  1. Geoffrey R. Gerdes, 2008. "Recent payment trends in the United States," Web Site, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages A75-A106.
  2. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. John Y. Campbell, 2008. "Asset Prices and Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number camp06-1, October.
  4. Humphrey, David B. & Keppler, Robert H. & Montes-Negret, Fernando, 1997. "Cost recovery and pricing of payment services," Policy Research Working Paper Series 1833, The World Bank.
  5. Campbell, John Y. (ed.), 2008. "Asset Prices and Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, number 9780226092119, April.
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Cited by:
  1. Aleksander Berentsen & Guido Menzio & Randall Wright, 2008. "Inflation and Unemployment in the Long Run," PIER Working Paper Archive 08-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Pedro Gomis-Porqueras & Daniel R. Sanches, 2010. "Optimal monetary policy in a model of money and credit," Working Papers 11-4, Federal Reserve Bank of Philadelphia.

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