IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/rdp2001_026.html
   My bibliography  Save this paper

Payment and financial innovation, reserve demand and implementation of monetary policy

Author

Listed:
  • Lahdenperä, Harri

Abstract

The 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.

Suggested Citation

  • Lahdenperä, Harri, 2001. "Payment and financial innovation, reserve demand and implementation of monetary policy," Bank of Finland Research Discussion Papers 26/2001, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2001_026
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/211904/1/bof-rdp2001-026.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Freedman, Charles, 2000. "Monetary Policy Implementation: Past, Present and Future--Will Electronic Money Lead to the Eventual Demise of Central Banking?," International Finance, Wiley Blackwell, vol. 3(2), pages 211-227, July.
    2. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, vol. 44(4-6), pages 713-718, May.
    3. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 413-435.
    4. Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January.
    5. Aleksander Berentsen, 1998. "Monetary Policy Implications of Digital Money," Kyklos, Wiley Blackwell, vol. 51(1), pages 89-118, February.
    6. Mervyn A. King, 1999. "Challenges for monetary policy : new and old," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-57.
    7. Goodhart, C A E, 1987. "Why Do Banks Need a Central Bank?," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 75-89, March.
    8. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    9. Santomero, Anthony M & Seater, John J, 1996. "Alternative Monies and the Demand for Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 942-960, November.
    10. Benjamin M. Friedman, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," NBER Working Papers 7955, National Bureau of Economic Research, Inc.
    11. Olivera, Julio H G, 1971. "The Square-Root Law of Precautionary Reserves," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1095-1104, Sept.-Oct.
    12. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    13. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174, National Bureau of Economic Research, Inc.
    14. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    15. Marvin Goodfriend, 1991. "Money, credit, banking, and payments system policy," Economic Review, Federal Reserve Bank of Richmond, vol. 77(Jan), pages 7-23.
    16. Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, vol. 45(2), pages 277-283, June.
    17. repec:zbw:bofrdp:2000_006 is not listed on IDEAS
    18. repec:zbw:bofrdp:2001_001 is not listed on IDEAS
    19. Russell W. Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis.
    20. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    21. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
    22. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
    23. Mr. Alain Ize & Mr. Arto Kovanen & Timo Henckel, 1999. "Central Banking Without Central Bank Money," IMF Working Papers 1999/092, International Monetary Fund.
    24. Michael Woodford, 2000. "Monetary Policy in a World Without Money," International Finance, Wiley Blackwell, vol. 3(2), pages 229-260, July.
    25. De Grauwe, Paul & Storti, Claudia Costa, 2001. "Monetary Policy in a Cashless Society," CEPR Discussion Papers 2696, C.E.P.R. Discussion Papers.
    26. Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance, Wiley Blackwell, vol. 2(3), pages 321-338, November.
    27. Jacob A. Frenkel & Boyan Jovanovic, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(1), pages 25-43.
    28. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    29. Charles A. E. Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," International Finance, Wiley Blackwell, vol. 3(2), pages 189-209, July.
    30. Benjamin M. Friedman, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Wiley Blackwell, vol. 3(2), pages 261-272, July.
    31. Friedman, Benjamin M, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Wiley Blackwell, vol. 3(2), pages 261-272, July.
    32. Goodhart, Charles A. E., 1993. "Can we improve the structure of financial systems?," European Economic Review, Elsevier, vol. 37(2-3), pages 269-291, April.
    33. Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army With Only a Signal Corps," NBER Working Papers 7420, National Bureau of Economic Research, Inc.
    34. repec:zbw:bofrdp:2000_003 is not listed on IDEAS
    35. Friedman, Benjamin M, 1999. "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance, Wiley Blackwell, vol. 2(3), pages 321-338, November.
    36. Bordo, Michael D & Jonung, Lars & Siklos, Pierre L, 1997. "Institutional Change and the Velocity of Money: A Century of Evidence," Economic Inquiry, Western Economic Association International, vol. 35(4), pages 710-724, October.
    37. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 44, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Korhonen, Tapio, 2001. "Finnish monetary and foreign exchange policy and the changeover to the euro," Research Discussion Papers 25/2001, Bank of Finland.
    2. repec:zbw:bofrdp:2001_025 is not listed on IDEAS
    3. Jan Marc Berk, 2002. "Central banking and financial innovation. A survey of the modern literature," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 55(222), pages 263-297.
    4. Jan Marc Berk, 2002. "Banca centrale e innovazione finanziaria. Una rassegna della letteratura recente," Moneta e Credito, Economia civile, vol. 55(220), pages 345-385.
    5. Jan Marc Berk, 2002. "Central banking and financial innovation. A survey of the modern literature," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 55(222), pages 263-297.
    6. Thornton, Daniel L., 2014. "Monetary policy: Why money matters (and interest rates don’t)," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 202-213.
    7. Jan Marc Berk, 2002. "New Economy, Old Central Banks?," Tinbergen Institute Discussion Papers 02-087/2, Tinbergen Institute, revised 01 Aug 2002.
    8. C. Sardoni, 2006. "Why Central Banks (and Money) Rule the Roost," Economics Working Paper Archive wp_457, Levy Economics Institute.
    9. Markose, Sheri M & Loke, Yiing Jia, 2002. "Can cash hold its own? International comparisons: Theory and evidence," Economics Discussion Papers 3734, University of Essex, Department of Economics.
    10. Mr. Saleh M. Nsouli & Connel Fullenkamp, 2004. "Six Puzzles in Electronic Money and Banking," IMF Working Papers 2004/019, International Monetary Fund.
    11. Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-370.
    12. Gilbert Cette & Christian Pfister, 2004. "Challenges of the “New Economy” for Monetary Policy," International Productivity Monitor, Centre for the Study of Living Standards, vol. 8, pages 27-36, Spring.
    13. Geoffrey R. Dunbar, 2019. "Demographics and the demand for currency," Empirical Economics, Springer, vol. 57(4), pages 1375-1409, October.
    14. McCallum, Bennett T. & Nelson, Edward, 2010. "Money and Inflation: Some Critical Issues," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 3, pages 97-153, Elsevier.
    15. Berk, Jan Marc, 2001. "New economy, old central banks? Monetary transmission in a new economic environment," Serie Research Memoranda 0032, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    16. John Hawkins, 2001. "Electronic finance and monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Electronic finance: a new perspective and challenges, volume 7, pages 98-105, Bank for International Settlements.
    17. Daniel L. Thornton, 2006. "The daily liquidity effect," Working Papers 2006-020, Federal Reserve Bank of St. Louis.
    18. Hervé Sitruk, 2008. "Monnaie électronique, monnaie fiduciaire et monnaie scripturale. Quelles substitutions ? Quelles stratégies ?," Revue d'Économie Financière, Programme National Persée, vol. 91(1), pages 37-51.
    19. Bank for International Settlements, 2001. "Electronic finance: a new perspective and challenges," BIS Papers, Bank for International Settlements, number 07.
    20. Rua, António, 2018. "Modelling currency demand in a small open economy within a monetary union," Economic Modelling, Elsevier, vol. 74(C), pages 88-96.
    21. Michael Woodford, 2000. "Monetary Policy in a World Without Money," International Finance, Wiley Blackwell, vol. 3(2), pages 229-260, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:rdp2001_026. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.