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Currency and Checking Deposits as Means of Payment

Author

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  • Yiting Li

    (National Taiwan University)

Abstract

We consider a record keeping cost to distinguish checking deposits from currency in a model where means-of-payment decisions and liquidity of assets are modelled explicitly. An equilibrium exists where checks are used only in big transactions while cash is used in all transactions. Higher inflation or lower reserve requirements raise the deposit interest rate, lower the currency deposit ratio and thereby increase the money multiplier and money supply. Monetary policy has differential impacts on the terms of trade in transactions using different means of payment. During high inflation, individuals economize on the holdings of nominal assets and use checks more frequently, implying higher liquidity of M1. (Copyright: Elsevier)

Suggested Citation

  • Yiting Li, 2011. "Currency and Checking Deposits as Means of Payment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 403-417, April.
    • Handle: RePEc:red:issued:09-110
    DOI: 10.1016/j.red.2009.11.002
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    References listed on IDEAS

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    1. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. John Y. Campbell, 2008. "Asset Prices and Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number camp06-1, September.
    3. Humphrey, David B. & Keppler, Robert H. & Montes-Negret, Fernando, 1997. "Cost recovery and pricing of payment services," Policy Research Working Paper Series 1833, The World Bank.
    4. Geoffrey R. Gerdes, 2008. "Recent payment trends in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 94(Oct), October.
    5. Campbell, John Y. (ed.), 2008. "Asset Prices and Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, number 9780226092119.
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    Cited by:

    1. Berentsen, Aleksander & Huber, Samuel & Marchesiani, Alessandro, 2016. "The societal benefit of a financial transaction tax," European Economic Review, Elsevier, vol. 89(C), pages 303-323.
    2. Françoise Vasselin, 2018. "The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View," Working Papers hal-01722404, HAL.
    3. Pidong Huang & Manjong Lee, 2015. "Coordination on Use of Non-deferred Electronic Payment Instruments," Korean Economic Review, Korean Economic Association, vol. 31, pages 5-24.
    4. Hazra, Devika, 2017. "Monetary policy and alternative means of payment," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 378-387.
    5. Jonathan Chiu & Tsz-Nga Wong, 2015. "On the Essentiality of E-Money," Staff Working Papers 15-43, Bank of Canada.
    6. Pidong Huang & Young Sik Kim & Manjong Lee, 2014. "Optimal Allocation of Social Cost for Electronic Payment System: A Ramsey Approach," Discussion Paper Series 1402, Institute of Economic Research, Korea University.
    7. Ayushi Bajaj & Nikhil Damodaran, 2021. "Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization," Monash Economics Working Papers 2021-15, Monash University, Department of Economics.
    8. Mariana Rojas Breu, 2013. "The Welfare Effect Of Access To Credit," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 235-247, January.
    9. Pedro Gomis-Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, June.
    10. Lee, Manjong, 2014. "Constrained or unconstrained price for debit card payment?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 53-65.
    11. Aleksander Berentsen & Guido Menzio & Randall Wright, 2011. "Inflation and Unemployment in the Long Run," American Economic Review, American Economic Association, vol. 101(1), pages 371-398, February.
    12. Sébastien Lotz & Françoise Vasselin, 2019. "A New Monetarist Model Of Fiat And E‐Money," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 498-514, January.
    13. Chiu, Jonathan & Wong, Tsz-Nga, 2022. "Payments on digital platforms: Resiliency, interoperability and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    14. Davoodalhosseini, Seyed Mohammadreza, 2022. "Central bank digital currency and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    15. Choi, Hyung Sun, 2019. "Money, debit card, gross-settlement risk, and central banking," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    16. Matsuoka, Tarishi, 2022. "Asset prices and standing facilities in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    17. Ayushi Bajaj & Nikhil Damodaran, 2020. "Consumer Payment Choice and the Heterogeneous Impact of India’s Demonetization," Monash Economics Working Papers 07-20, Monash University, Department of Economics.
    18. Bajaj, Ayushi & Damodaran, Nikhil, 2022. "Consumer payment choice and the heterogeneous impact of India’s demonetization," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    19. Zhixiu Yu, 2023. "On the Coexistence of Cryptocurrency and Fiat Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 147-180, July.
    20. Hendrickson, Joshua R. & Park, Jaevin, 2021. "The case against eliminating large denomination bills," Journal of Macroeconomics, Elsevier, vol. 68(C).
    21. Jonathan Chiu & Tsz-Nga Wong, 2015. "On the Essentiality of E-Money," Staff Working Papers 15-43, Bank of Canada.

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    More about this item

    Keywords

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    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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