 Monetary policy and alternative means of paymentDevika Hazra The Quarterly Review of Economics and Finance, 2017, vol. 65, issue C, 378-387 Abstract: This paper captures the trade-offs between alternative payment instruments where each is associated with costs and benefits. Most models of cash–credit choice assume cash is a safe non-interest-bearing asset and credit is interest-bearing but costly. Here, I consider the risk of loss from using cash resulting from theft and foregone interest earnings. I use a cash-in-advance model to analyze the channel through which monetary policy could have a positive impact on the economy by altering the incentives for cash–credit choice. The model indicates that although expansionary monetary policy increases total consumption, the resulting substitution toward credit might increase transactions cost, which may not result in improving welfare. The net effect depends on the change in transactions cost of using credit relative to the responsiveness of theft to inflation. The assumption of fixed cost of credit is crucial to these results. Calibration of the model to the US and Polish economy confirms the results. Keywords: Cash–credit choice; Means of payment; Monetary policy; Risk of loss; Welfare (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:65:y:2017:i:c:p:378-387 DOI: 10.1016/j.qref.2016.11.002 Access Statistics for this article The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty More articles in The Quarterly Review of Economics and Finance from Elsevier |
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