On Money as a Medium of Exchange in Near-Cashless Credit Economies

Lagos, Ricardo; Zhang, Shengxing

doi:10.2139/ssrn.3141226

Cited by 7 publications

(13 citation statements)

References 24 publications

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“…Intuitively, when the nominal interest is sufficiently high, households become liquidity-constrained in type 3 meetings. 29 As a result, money demand becomes less elastic.…”

Section: Calibrationmentioning

confidence: 99%

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Central Bank Digital Currency and Banking

et al. 2019

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One frequently raised concern about a central bank digital currency (CBDC) is that it is likely to compete with bank deposits as a means of payment and therefore increase private banks' funding costs and induce disintermediation. We develop a micro-founded general equilibrium model with money and banking to evaluate this concern both theoretically and quantitatively. We find that when banks have market powers in the deposit market, introducing a CBDC that competes with bank deposits as a means of payment can compel banks to raise the deposit rate and expand bank intermediation and output. The model calibrated to the U.S. economy suggests that a CBDC with a proper interest rate can raise bank lending by 3.55% and output by 0.50%. We also use the framework to evaluate other dimensions of the CBDC design, including acceptability, eligibility as reserves and the rule of supply, and assess the role of a CBDC as the economy becomes increasingly cashless.

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“…Intuitively, when the nominal interest is sufficiently high, households become liquidity-constrained in type 3 meetings. 29 As a result, money demand becomes less elastic.…”

Section: Calibrationmentioning

confidence: 99%

“…This assumption is consistent with the data. The demand for M1 is very stable over a long horizon, during whichαs may have changed a lot with the introduction of credit/debit cards 29. The liquidity constraint always binds in type 1 and type 2 meetings.…”

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confidence: 99%

Central Bank Digital Currency and Banking

et al. 2019

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“…Lagos and Zhang (2018) argue theoretically that monetary models without money are generically poor approximations even to highly developed credit economies.3Alvarez and Lippi (2009) examine the impact of financial innovation on the demand for cash.4 The December 31st limit applied to ordinary note holders. Non-resident Indian citizens could continue to deposit old notes until June 30, 2017.…”

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confidence: 99%

Cash and the Economy: Evidence from India's Demonetization

Chodorow-Reich

Gopinath

Mishra

et al. 2018

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We analyze a unique episode in the history of monetary economics, the 2016 Indian "demonetization." This policy made 86% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: the geographic distribution of demonetized and new notes for causal inference; nightlight activity and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in employment and nightlights-based output due to demonetization of 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. These cumulated effects provide a lower bound for the aggregate effects of demonetization. Our analysis rejects money non-neutrality using a large scale natural experiment, something that is yet rare in the vast literature on the effects of monetary policy.

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“…We focus on the steady state equilibrium and study optimal monetary policy from the welfare point of view. 2 This paper is closely related to Lagos and Zhang (2018), who show that the central bank monetary policy stays e¤ective even if the economy becomes close to cashless. This is because the …at money provides an outside option and hence can discipline agents'behaviors even if it is not used.…”

Section: Introductionmentioning

confidence: 84%

A Framework for Analyzing Monetary Policy in an Economy with E-Money

Zhu

Hendry

2018

SSRN Journal

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Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank's Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

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On Money as a Medium of Exchange in Near-Cashless Credit Economies

Cited by 7 publications

References 24 publications

Central Bank Digital Currency and Banking

Central Bank Digital Currency and Banking

Cash and the Economy: Evidence from India's Demonetization

A Framework for Analyzing Monetary Policy in an Economy with E-Money

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