The evolution of cash transactions : some implications for monetary policy
This paper considers the implications for monetary policy of a decreasing demand for outside money. It finds that even perpetual declines in the demand for base money pose no threat to the traditional methods employed for conducting monetary policy. The effects of such reductions in the demand for central bank liabilities, however, do depend on how monetary policy is conducted. Four monetary policy regimes are analyzed. With a policy of nominal-interest-rate targeting, a secular decline in the volume of cash transactions unambiguously leads to accelerating inflation. A policy of maintaining a fixed composition of government liabilities leads to accelerating (decelerating) inflation if agents have sufficiently high (low) levels of risk aversion. Inflation targeting produces falling nominal and real interest rates, while a policy of fixing the rate of money growth can easily lead to indeterminacy and endogenous oscillation in interest rates. It is argued that a policy of fixing the composition of government liabilities has several advantages if it is known that agents are not too risk averse and that the asymptotic demand for base money is small. If this information is not known, then interest-rate or inflation targeting have an advantage because their consequences are not sensitive to such environmental features.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Woodford, 1997.
"Doing Without Money: Controlling Inflation in a Post-Monetary World,"
NBER Working Papers
6188, National Bureau of Economic Research, Inc.
- 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.
- Woodford, M., 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Papers 632, Stockholm - International Economic Studies.
- Woodford, Michael, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Seminar Papers 632, Stockholm University, Institute for International Economic Studies.
- Champ, B. & Smith, B.D., 1991.
"Currency Elasticity and Banking Panics: theory and Evidence,"
University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers
9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
- 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 828-64, November.
- Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
- Stacey L. Schreft & Bruce D. Smith, 1997.
"The effects of open market operations in a model of intermediation and growth,"
Research Working Paper
97-03, Federal Reserve Bank of Kansas City.
- Schreft, Stacey L & Smith, Bruce D, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 519-50, July.
- Stacey L. Schreft & Bruce D. Smith, 1995. "The effects of open market operations in a model of intermediation and growth," Working Papers 562, Federal Reserve Bank of Minneapolis.
- Stacey L. Schreft & Bruce D. Smith, 1994. "The effects of open market operations in a model of intermediation and growth," Working Paper 94-10, Federal Reserve Bank of Richmond.
- Greenwood, Jeremy & Smith, Bruce D., 1997.
"Financial markets in development, and the development of financial markets,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 21(1), pages 145-181, January.
- Greenwood, J. & Smith, B.D., 1995. "Financial Markets in Development, and the Development of Financial Markets," RCER Working Papers 406, University of Rochester - Center for Economic Research (RCER).
- Ireland, Peter N., 1994. "Economic growth, financial evolution, and the long-run behavior of velocity," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 815-848.
- Williamson, S.D., 1995.
"Discount Window Lending and Deposit Insurance,"
95-01, University of Iowa, Department of Economics.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Gordon H. Sellon, Jr. & Stuart E. Weiner, 1996. "Monetary policy without reserve requirements: analytical issues," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-24.
- Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
- Schreft, Stacey L. & Smith, Bruce D., 1997.
"Money, Banking, and Capital Formation,"
Journal of Economic Theory,
Elsevier, vol. 73(1), pages 157-182, March.
- Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer, vol. 2(2), pages 283-96, April.
When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:99-02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit)
If references are entirely missing, you can add them using this form.