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Payment systems, inside money and financial intermediation

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  • Merrouche, Ouarda

    ()
    (Bank of England)

  • Nier, Erlend

    ()
    (International Monetary Fund)

Abstract

We assess the impact of introducing an efficient payment system on financial intermediation. Two channels are investigated. Innovations in wholesale payments technology enhance the security and speed of inside money as a payment medium for customers and therefore affect the split between holdings of cash (outside money) and holdings of deposits (inside money). Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds. This reduces the need for banks to hold excess reserves and thus helps credit creation. We examine these links empirically using payment systems reforms in Eastern European countries as our laboratory. We find evidence that reforms led to a 'crowding in' of cash in favour of demand deposits and that this in turn enabled a prolonged credit expansion in our sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, we do not find this effect was causal for the credit boom observed in these countries.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 371.

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Length: 33 pages
Date of creation: 08 Jun 2009
Date of revision:
Handle: RePEc:boe:boeewp:0371

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Keywords: Payment system reforms; credit accelerations; liquidity preference shocks;

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