Payment and financial innovation, reserve demand and implementation of monetary policy
AbstractThe consequences of electronic trading, payment and settlement have recently become one of the main topics in monetary economics. New innovations in payment and settlement technology are challenging the central bank’s monopoly over the supply of base money, which is generally considered the cornerstone of the central bank’s power to set the short-term interest rate for the economy. This paper demonstrates that the development of the economy’s transaction technology over time has indeed had a significant quantitative impact on the demand for currency and bank reserves, and indirectly on the modalities of the supply of reserves by the central bank. In contrast to past trends, the latest innovations in payment and settlement technology imply not only a quantitative change but also a qualitative one, as they enable private institutions to issue settlement money that competes with the liabilities of the central bank. The paper presents a model on the implementation of monetary policy in an economy where such private substitutes for central bank money are available for the settlement of transactions, showing that effective monetary control by the central bank might indeed be compromised in those circumstances. However, the study also highlights several attributes that may distinguish central bank liabilities from any private alternatives, some of which are based on the central bank’s traditional role as the banker for the Government.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 26/2001.
Length: 61 pages
Date of creation: 12 Dec 2001
Date of revision:
monetary policy; reserve demand; payment systems; financial innovation;
Find related papers by JEL classification:
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
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