Electronic Money and Its Impact on Central Banking and Monetary Policy

1862 Words 8 Pages
Electronic Money and Its Impact on Central Banking and Monetary Policy

“The term [electronic] money refers to various proposed electronic payment mechanisms designed for use by consumers to make retail payments. Digital money products have the potential to replace central bank currency” (Berentsen 1). This quote indicates that the advent of electronic money will have an impact on the banking system and monetary policy. While this topic is controversial it seems obvious that some changes will result and that there is no prefect answer to predict this new instruments affect on monetary aggregates and the role of central banks. Its growth will be based on many things: future technology, increased security, regulation, and ease of
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Many economists believe electronic money could completely replace currency while others feel that its impact will be less drastic. The ability to control the money supply depends on the definition of money, M1. M1 currently includes currency, traveler’s checks and demand deposits. If the use of these variables were to decrease due to an increased reliance on electronic money, M1 would not serve as an accurate measure of money in the economy. The decreased ability to measure monetary aggregates will limit the central bank’s ability to conduct open market operations and target the money supply. This will be offset by the fact that “new digital monies are fully backed by assets such as gold or high-quality financial instruments. Therefore, the need to conduct open market operations will diminish, because the supply of money for transactions should automatically adjust to demand” (Rahn 4). If the money supply is assumed to be fixed, “when the currency weight decreases gradually as the use of electronic money increases, the scale of the central bank’s assets and liabilities will be reduced, which may lead to a weakening of money management and of the interest rate management through open market operations” (Tak 77). The idea that digital money is commodity based may be overly optimistic. The possibility
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