The Impact of Electronic Money on Monetary Policy: Based on DSGE Model Simulations

Abstract

Starting with the interactive relationship between electronic money and household consumption stimuli, this paper deeply analyzes the changes in the behavior of each monetary subject under the impact of electronic money, and establishes a DSGE model based on the three economic sectors of family, commercial bank and central bank under the New Keynesian framework. On this basis, the impact of electronic money on savings, loans, output and the interest rate, and its impact on monetary policy, are described by numerical simulation. The simulation results show that: (1) electronic money has asymmetric effects on savings and loans, but an irrational deviation on households; (2) the influence of electronic money on the interest rate has a reverse effect, and the “inverse adjustment” of the interest rate increases the management difficulty of the micro subject to a certain extent, and affects the effectiveness of monetary policy; (3) the regulatory effect of price monetary policy is better than that of quantitative monetary policy, and electronic money has the effect of its risk restraining impact. Finally, based on the analysis, this paper gives policy recommendations.

Estimating the effects of electronic money on the income velocity of money in Indonesia

“…However, in short-term estimations, inflation has a significant negative effect on the income velocity of money. These results are different from those of previous studies by Al-Tamimi [31], Luo, et al [19], Roy, et al [20], and Khanom [28], which found that the relationship between velocity of money and inflation is positive. Depending on how it affects money balances and income growth more generally, inflation's influence on the velocity of money can be either positive or negative.…”

“…Moreover, electronic money will, to some extent, exacerbate the fluctuations and boost the impact of the money multiplier. Luo, et al [19] analyzed how each type of money changed as a result of electronic money and created a dynamics model based on the family, the commercial bank, and the national bank areas. Their findings indicate that electronic money has unequal effects on deposits and lending while having an unreasonable divergence on households.…”

Investigating the monetary policy risk channel based on the dynamic stochastic general equilibrium model: Empirical evidence from Iran

“…In a research, Luo et al [ 30 ] have tried to find out what effect electronic money has on the monetary policies of different economies and in this way they have used the DSGE model in the New Keynesian framework. The noteworthy point is that in the presented model, three sectors of household, bank and central bank have been analyzed.…”

Monetary Policy Implications of Electronic Money Adoption: Evidence from Nigeria

“…Most studies have primarily used descriptive-analytical methods, while others have examined the issue theoretically. Apart from a few studies such as Zhang and Ma (2011), Owen and Fogelstrom (2005), Luo, Zhou, and Zhou (2021), Ndirangu and Nyamongo (2015), Kitamura (2022), and related studies in Nigeria such as Folarin and Asongu (2019) and Onah, Ujunwa, Ujunwa, and Ogundele (2021), empirical literature has been relatively silent on the implications of electronic money on monetary policy, particularly in developing countries like Nigeria. This knowledge gap is particularly relevant considering the increasing volume of electronic money in Nigeria, the adoption of the e-naira, and the Central Bank of Nigeria's efforts to promote a cashless economy.…”

“…This study reviewed a few that have introduced a different approach to the issue. The effect of electronic money on money demand is examined through two main dimensions: the velocity of money and currency circulation (Luo et al, 2021). For instance, Zhang and Ma (2011) utilised multivariate time-series econometric models to analyse the impact of electronic money on money supply using the velocity of money in circulation as an approach in China.…”