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Payment systems, inside money and financial intermediation

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  • Merrouche, Ouarda
  • Nier, Erlend

Abstract

This paper assesses the impact of introducing an efficient payment system on the amount of credit provided by the banking system. Two channels are investigated. First, innovations in wholesale payments technology enhance the security and speed of deposits as a payment medium for customers and therefore affect the split between holdings of cash and the holdings of deposits that can be intermediated by the banking system. Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds, which reduces the need for banks to hold excess reserves. The authors examine these links empirically using payment system reforms in Eastern European countries as a laboratory. The analysis finds evidence that reforms led to a shift away from cash in favor of demand deposits and that this in turn enabled a prolonged credit expansion in the sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, this effect was not causal for the credit boom observed in these countries.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5445.

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Date of creation: 01 Oct 2010
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Handle: RePEc:wbk:wbrwps:5445

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Keywords: Banks&Banking Reform; Debt Markets; Bankruptcy and Resolution of Financial Distress; Access to Finance; Currencies and Exchange Rates;

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  1. Douglas Gale & Tanju Yorulmazer, 2011. "Liquidity Hoarding," FMG Discussion Papers dp682, Financial Markets Group.
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  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. International Monetary Fund, 1994. "The Payments Systems Reforms and Monetary Policy in Emerging Market Economies in Central and Eastern Europe," IMF Working Papers 94/13, International Monetary Fund.
  10. Scott Roger, 2009. "Inflation Targeting At 20," IMF Working Papers 09/236, International Monetary Fund.
  11. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander, 2000. "The credit crunch in East Asia : what can bank excess liquid assets tell us ?," Policy Research Working Paper Series 2483, The World Bank.
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  13. Hugh Rockoff, 1993. "The Meaning of Money in the Great Depression," NBER Historical Working Papers 0052, National Bureau of Economic Research, Inc.
  14. Anil Kashyap & Raghuram Rajan & Jeremy S. Stein, 1998. "Banks as liquidity providers: an explanation for the co-existence of lending and deposit-taking," Proceedings 582, Federal Reserve Bank of Chicago.
  15. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  16. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
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