The Effect of Bank Credit Cards On the Household Transactions Demand for Money

Abstract

In recent years monetary economists have displayed a small, but growing interest in the impact of bank credit cards on economic variables.l Of particular interest has been the question of the effect of credit cards on the demand for and velocity of money. Most economists believe that the money supply partially determines the level of economic activity. Changes in the demand for money due to the increased use of credit cards are likely to alter the linkage between the stock of money and other economic aggregates. This study serves to link theoretical models of the transactions demand for money to empirical observations on a cross-section of households in order to provide answers to the above question. At present, credit card usage varies widely across households; a considerable number of individuals have credit cards but are not active users. A cross-section study of households can be used to identify the relation between different levels of credit card usage and household demand for demand deposits. The results of the crosssection study can be extrapolated to describe potential money demand by households in a world where credit cards are widely used by everyone for transactions purposes. A number of plausible hypotheses can be proposed to describe the effect of credit card transactions on the household demand for money. One hypothesis is that active card users tend to hold higher average demand deposit balances than non-users.