Payment systems, inside money and financial intermediation

Ouarda Merrouche () and Erlend Nier ()
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Ouarda Merrouche: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Erlend Nier: International Monetary Fund, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 371, Bank of England working papers from Bank of England

Abstract: We assess the impact of introducing an efficient payment system on financial intermediation. Two channels are investigated. Innovations in wholesale payments technology enhance the security and speed of inside money as a payment medium for customers and therefore affect the split between holdings of cash (outside money) and holdings of deposits (inside money). Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds. This reduces the need for banks to hold excess reserves and thus helps credit creation. We examine these links empirically using payment systems reforms in Eastern European countries as our laboratory. We find evidence that reforms led to a 'crowding in' of cash in favour of demand deposits and that this in turn enabled a prolonged credit expansion in our sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, we do not find this effect was causal for the credit boom observed in these countries.

Keywords: Payment system reforms; credit accelerations; liquidity preference shocks (search for similar items in EconPapers)
JEL-codes: G20 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2009-06-08

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