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Payment Cards and Money Demand in Belgium

Author

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  • Laura Rinaldi

    () (K.U.Leuven, C.E.S., International Economics)

Abstract

The aim of this paper is to analyse the impact of payment cards use on the amount of money in circulation in Belgium. In all developed countries the amout of notes and coins has decreased over the past years. Such tendency can be attributed to a slow, but continuous process of substitution of cash by other means of payment for everyday transactions. If the substitution was first due to a widespread used of cheques, more recently this was intensified by cards' diffusion. This claim is supported by several empirical studies reviewed in this paper. They confirm the role of cards, together with their infrastructure (ATMs and EFT-POS terminals), in decreasing the number of cash transactions. We study a money demand model in Belgium through a co- integration analysis, where money is a function of structural variables, as well as some variables reflecting card's use in order to account for the substitution effect. We find that cards (debit, credit and, more recently, electronic purses) significantly contributed to the long run reduction of outstanding currency in Belgium over the last forty years. We extended the long run analysis into a more general error-correction model where short run imbalances significantly adjust to the long run relationship. Currency appears to respond quite slowly to disequilibria. Finally, we examine the dynamics of the model by means of impulse response functions that forecast the future developments of money demand.

Suggested Citation

  • Laura Rinaldi, "undated". "Payment Cards and Money Demand in Belgium," International Economics Working Papers Series ces0116, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
  • Handle: RePEc:kul:kulwps:ces0116
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    File URL: http://www.econ.kuleuven.ac.be/ew/admin/Publications/Dps0116.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:bdi:opques:qef_144_01 is not listed on IDEAS
    2. Francisco J. Callado-Muñoz & Jana Hromcová & Natalia Utrero-González, 2014. "Effects of Institutional Environment and Technology Development on Payment Choice," Working Papers wpdea1403, Department of Applied Economics at Universitat Autonoma of Barcelona.
    3. Guerino Ardizzi & Eleonora Iachini, 2013. "Why are payment habits so heterogeneous across and within countries? Evidence from European countries and Italian regions," Questioni di Economia e Finanza (Occasional Papers) 144, Bank of Italy, Economic Research and International Relations Area.
    4. Helmut Stix, 2004. "How Do Debit Cards Affect Cash Demand? Survey Data Evidence," Economic Change and Restructuring, Springer, vol. 31(2), pages 93-115, June.
    5. Francisco J. Callado-Muñoz & Jana Hromcová & Natalia Utrero-González, 2012. "Transformation of payment systems: the case of European Union enlargement," Applied Economics Letters, Taylor & Francis Journals, vol. 19(18), pages 1787-1791, December.
    6. repec:eco:journ1:2017-05-58 is not listed on IDEAS
    7. Jyrkönen, Hanna, 2004. "Less cash on the counter : forecasting Finnish payment preferences," Research Discussion Papers 27/2004, Bank of Finland.
    8. David, Bounie & Abel, François & Patrick, Waelbroeck, 2016. "Debit card and demand for cash," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 55-66.

    More about this item

    Keywords

    Money demand; cash substitution; conintegration; error-correction model; impulse response analysis;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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