The Role of Card Acceptance in the Transaction Demand for Money

Philipp Schmidt-Dengler, Helmut Stix and Kim Huynh

No 10183, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.

Keywords: Counterfactual distributions; Endogenous switching regression; Inventory models of money (search for similar items in EconPapers)
JEL-codes: C35 C83 E41 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban, nep-ict, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Related works:
Working Paper: The Role of Card Acceptance in the Transaction Demand for Money (2014)
Working Paper: The Role of Card Acceptance in the Transaction Demand for Money (2014)
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