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Payment Cards and Money Demand in Belgium

Listed author(s):
  • Laura Rinaldi


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

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.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number ces0116.

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Length: 29 pages
Date of creation:
Handle: RePEc:kul:kulwps:ces0116
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