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Stored value cards: costly private substitutes for currency

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  • Jeffrey M. Lacker

Abstract

A model in which both currency and stored value cards are used to make payments is presented. I compare steady-state equilibria with and without stored value cards. Stored value cards are beneficial because they help alleviate the deadweight loss due to inflation. When the nominal interest rate is greater than the government's resource cost of providing currency, the alternative means of payment may have larger real resource costs than the currency it replaces. Stored value results in either a net increase or a net decrease in economic welfare depending upon whether average costs are below or above a certain cut-off. Quantitative restrictions on stored value can be socially beneficial because they reduce the amount of resources absorbed by the most costly stored value applications.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 96-03.

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Date of creation: 1996
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Handle: RePEc:fip:fedrwp:96-03

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Keywords: Money ; Smart cards;

References

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  1. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction services, inflation, and welfare," Staff Report 241, Federal Reserve Bank of Minneapolis.
  2. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  3. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June.
  4. Jeffrey M. Lacker, 1993. "Should we subsidize the use of currency?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-73.
  5. S.L. Schreft, 1991. "Welfare-improving credit controls," Working Paper 91-01, Federal Reserve Bank of Richmond.
  6. Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-91, December.
  7. Bryant, John & Wallace, Neil, 1984. "A Price Discrimination Analysis of Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 279-88, April.
  8. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  9. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
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