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Demand for Currency, New Technology and the Adoption of Electronic Money: Evidence Using Individual Household Data

Authors
Disciplines
  • Economics

Abstract

Accurate information on money demand is essential for evaluation of monetary policy. In this regard, it is important to study the effect of financial innovation to money demand. We investigate the effect of a new form of such technology, electronic money, to money demand. Specifically, we estimate currency demand functions conditional on electronic money adoption using unique household-level survey data from Japan. We obtain the following results. First, currency demand indicates that average cash balances do not decrease with the adoption of electronic money. Rather, it seems to increase under some specifications. Second, households at the lowest quantile of the cash balance distribution tend to have higher cash balances after adopting of electronic money. These findings indicate that consumers do not significantly substitute cash holding with e-money holding despite the rapid diffusion of electronic money among households.

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