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Payment Cards and Money Demand in Belgium

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  • Laura Rinaldi

    ()
    (K.U.Leuven, C.E.S., International Economics)

Abstract

The aim of this paper is to analyse the impact of payment cards use on the amount of money in circulation in Belgium. In all developed countries the amout of notes and coins has decreased over the past years. Such tendency can be attributed to a slow, but continuous process of substitution of cash by other means of payment for everyday transactions. If the substitution was first due to a widespread used of cheques, more recently this was intensified by cards' diffusion. This claim is supported by several empirical studies reviewed in this paper. They confirm the role of cards, together with their infrastructure (ATMs and EFT-POS terminals), in decreasing the number of cash transactions. We study a money demand model in Belgium through a co- integration analysis, where money is a function of structural variables, as well as some variables reflecting card's use in order to account for the substitution effect. We find that cards (debit, credit and, more recently, electronic purses) significantly contributed to the long run reduction of outstanding currency in Belgium over the last forty years. We extended the long run analysis into a more general error-correction model where short run imbalances significantly adjust to the long run relationship. Currency appears to respond quite slowly to disequilibria. Finally, we examine the dynamics of the model by means of impulse response functions that forecast the future developments of money demand.

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Bibliographic Info

Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number ces0116.

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Length: 29 pages
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Handle: RePEc:kul:kulwps:ces0116

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Keywords: Money demand; cash substitution; conintegration; error-correction model; impulse response analysis;

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Cited by:
  1. Francisco José Callado Muñoz & Jana Hromcová & Natalia Utrero González, 2011. "Transformation of payment systems: The case of European Union enlargement," Working Papers. Serie AD 2011-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. Francisco J. Callado-Muñoz & Jana Hromcová & Natalia Utrero-González, 2014. "Effects of Institutional Environment and Technology Development on Payment Choice," Working Papers wpdea1403, Department of Applied Economics at Universitat Autonoma of Barcelona.
  3. Guerino Ardizzi & Eleonora Iachini, 2013. "Why are payment habits so heterogeneous across and within countries? Evidence from European countries and Italian regions," Questioni di Economia e Finanza (Occasional Papers) 144, Bank of Italy, Economic Research and International Relations Area.
  4. Helmut Stix, 2004. "How Do Debit Cards Affect Cash Demand? Survey Data Evidence," Economic Change and Restructuring, Springer, vol. 31(2), pages 93-115, June.
  5. Helmut Stix, 2003. "How Do Debit Cards Affect Cash Demand? Survey Data Evidence," Working Papers 82, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Jyrkönen , Hanna, 2004. "Less cash on the counter: Forecasting Finnish payment preferences," Research Discussion Papers 27/2004, Bank of Finland.

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