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On the essentiality of E-money

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  • Chiu, Jonathan
  • Wong, Tsz-Nga

Abstract

Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement the optimal resource allocation. We find that, compared to cash, e-money technologies allowing limited participation, limited transferability and non-zero-sum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including non-linear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (Ã la the Dodd-Frank Act) can distort the optimal mechanism and reduce welfare.

Suggested Citation

  • Chiu, Jonathan & Wong, Tsz-Nga, 2016. "On the essentiality of E-money," Working Paper Series 5205, Victoria University of Wellington, School of Economics and Finance.
  • Handle: RePEc:vuw:vuwecf:5205
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/5205
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    Cited by:

    1. Jonathan Chiu & Tsz-Nga Wong, 2014. "E-Money: Efficiency, Stability and Optimal Policy," Staff Working Papers 14-16, Bank of Canada.
    2. Mohammad Davoodalhosseini, 2018. "Central Bank Digital Currency and Monetary Policy," Staff Working Papers 18-36, Bank of Canada.
    3. Cong, Lin W. & Li, Ye & Wang, Neng, 2019. "Token-Based Platform Finance," Working Paper Series 2019-28, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    4. Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2018. "Should the Central Bank Issue E-money?," Staff Working Papers 18-58, Bank of Canada.
    5. Wong, Tsz-Nga, 2016. "Monetary exchange and the irreducible cost of inflation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 218-229.
    6. Beata Szetela & Grzegorz Mentel & Stanislaw Gedek, 2016. "Dependency analysis between Bitcoin and selected global currencies," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 16, pages 133-144.
    7. Luca Marchiori, 2018. "Monetary theory reversed: Virtual currency issuance and miners’ remuneration," BCL working papers 115, Central Bank of Luxembourg.
    8. Walter Engert & Ben Fung, 2020. "A Uniform Currency in a Cashless Economy," Staff Analytical Notes 2020-7, Bank of Canada.
    9. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.

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    More about this item

    Keywords

    Money; Electronic money; Mechanism design; Search and matching; Efficiency;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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