IMF Working Paper: e-money replacing cash currencies
Monetary Policy, Monetary Areas,and Financial Developmentwith Electronic Money
Keywords: electronic money, monetary policy, monetary unions.
The recent evolution of the technology for financial transactions poses interesting questionsfor policymakers and financial institutions regarding the suitability of the current institutionalarrangements and the availability of instruments to guarantee financial stability, efficiency,and effectiveness of monetary policy. The aim of this paper is to dispel some of the mostextreme predictions.
The disappearance of money, central banks made redundant, monetary policy madeirrelevant are not logical impossibilities, but extreme events. It is not impossible to envision aworld with these most extreme characteristics (King, 1999) and to describe its functioning inthe new setup, but how likely are these events to occur? The view that they will happen in theforeseeable future cannot be shared. From an operational point of view, we need to askwhether the actual institutional arrangements can respond properly to the recent wave offinancial infrastructure innovations and if their policy instruments are still viable.
Regulatory concerns are raised by internet banking, electronic finance (e-finance), ande-money but are not addressed in these notes. Here the focus is primarily on the forcessustaining the development of e-money and on the central bank ability to conduct monetarypolicy in the presence of e-money.2
This paper argues that e-money, as a network good, could become an important form ofcurrency in the future. Such a development would influence the effectiveness andimplementation of monetary policy. If an increased use of e-money substantially limitsdemand for central bank reserves, it would require changes in the operational target of thecentral bank and a closer coordination of monetary and fiscal policies. The optimal size ofmonetary unions could differ should e-money play a prominent role.
However, the current level of e-money use does not pose a threat to the stability of thefinancial system, and central banks have the means to successfully implement the objectivesof monetary policy.
With respect to the current debate on the consequences of the introduction of e-money on theimplementation of monetary policy and in contrast with earlier work on this topic (Freedman,2000; Friedman, 2000; Goodhart, 2000; and Woodford 2000), this paper argues that centralbanks can lose control over monetary policy if the government does not run a responsiblefiscal policy. Central banks could react to this threat by introducing additional regulation orby resizing the monetary areas which they ought to regulate, as we shall argue in latersections.