Payment systems innovations, substitutive effects, and the real economy: The intervening role of currency holdings and excess reserves

Navendu Prakash, Shveta Singh and Seema Sharma

Journal of Economics and Business, 2025, vol. 133, issue C, No S0148619524000742

Abstract: The push for a digital economic framework has spurred multifaceted innovations in payments and settlement systems worldwide. The speed, accuracy, and reliability of payment infrastructure significantly influences monetary supply and credit flows, underscoring their critical role in monetary policy formulation. This paper elucidates the importance of efficient payment systems as precursors to financial intermediation. Distinguishing between large-value and retail payment systems, it examines the extant transmission mechanism via two intervening channels: currency holdings and excess reserves of commercial banks. The findings bear profound policy implications, advocating for transitioning to electronic payment systems that minimizes the use of cash. At the macroeconomic level, findings reveal how efficient payment systems enhance deposit intermediation, credit creation, and economic growth. Results indicate a marked degree of substitution between electronic and paper-based clearing platforms, and consequently, the shift towards electronic payments tends to reduce the negative effects of paper-based clearing on growth and consumption.

Keywords: Payment system; currency demand; excess reserves; monetary policy; real economy (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 N25 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:133:y:2025:i:c:s0148619524000742

DOI: 10.1016/j.jeconbus.2024.106232

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