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Payment systems, inside money and financial intermediation

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  • Merrouche, Ouarda

    () (Bank of England)

  • Nier, Erlend

    () (International Monetary Fund)

Abstract

We assess the impact of introducing an efficient payment system on financial intermediation. Two channels are investigated. Innovations in wholesale payments technology enhance the security and speed of inside money as a payment medium for customers and therefore affect the split between holdings of cash (outside money) and holdings of deposits (inside money). Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds. This reduces the need for banks to hold excess reserves and thus helps credit creation. We examine these links empirically using payment systems reforms in Eastern European countries as our laboratory. We find evidence that reforms led to a 'crowding in' of cash in favour of demand deposits and that this in turn enabled a prolonged credit expansion in our sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, we do not find this effect was causal for the credit boom observed in these countries.

Suggested Citation

  • Merrouche, Ouarda & Nier, Erlend, 2009. "Payment systems, inside money and financial intermediation," Bank of England working papers 371, Bank of England.
  • Handle: RePEc:boe:boeewp:0371
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    Cited by:

    1. Felipe Restrepo & Lina Cardona‐Sosa & Philip E. Strahan, 2019. "Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt," Journal of Finance, American Finance Association, vol. 74(6), pages 2875-2914, December.
    2. Itai Agur & Anil Ari & Giovanni Dell'Ariccia, 2019. "Designing Central Bank Digital Currencies," IMF Working Papers 2019/252, International Monetary Fund.
    3. Alexander Lubis & Constantinos Alexiou & Joseph G. Nellis, 2019. "Gauging the Impact of Payment System Innovations on Financial Intermediation: Novel Empirical Evidence from Indonesia," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(3), pages 290-338, December.
    4. Pierpaolo Iannozzi, 2013. "Strumenti di pagamento come leva di valorizzazione delle reti: l’esperienza delle fuel cards," ECONOMIA E DIRITTO DEL TERZIARIO, FrancoAngeli Editore, vol. 2013(3), pages 393-420.
    5. Restrepo, Felipe, 2019. "The effects of taxing bank transactions on bank credit and industrial growth: Evidence from Latin America," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 335-355.

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    More about this item

    Keywords

    Payment system reforms; credit accelerations; liquidity preference shocks;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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