The evolution of cash transactions: some implications for monetary policy

Stacey Schreft and Bruce Smith

No 99-02, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper considers the implications for monetary policy of a decreasing demand for outside money. It finds that even perpetual declines in the demand for base money pose no threat to the traditional methods employed for conducting monetary policy. The effects of such reductions in the demand for central bank liabilities, however, do depend on how monetary policy is conducted. Four monetary policy regimes are analyzed. With a policy of nominal-interest-rate targeting, a secular decline in the volume of cash transactions unambiguously leads to accelerating inflation. A policy of maintaining a fixed composition of government liabilities leads to accelerating (decelerating) inflation if agents have sufficiently high (low) levels of risk aversion. Inflation targeting produces falling nominal and real interest rates, while a policy of fixing the rate of money growth can easily lead to indeterminacy and endogenous oscillation in interest rates. It is argued that a policy of fixing the composition of government liabilities has several advantages if it is known that agents are not too risk averse and that the asymptotic demand for base money is small. If this information is not known, then interest-rate or inflation targeting have an advantage because their consequences are not sensitive to such environmental features.

Keywords: Payment systems; Monetary policy - United States; Cash flow (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-mon and nep-pke
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The evolution of cash transactions: Some implications for monetary policy (2000)
Working Paper: The evolution of cash transactions: some implications for monetary policy (1997)
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