Money Holdings Research Articles

Credibility of central banks in monetary economies

This paper develops a model of money to study interventions by a central bank that can monitor the money holdings of agents. I show that an off-the-equilibrium intervention enhances the use of money and stabilizes its values.

Protection of Electronic Money Saving Customers At the Bank

Currently developing again with the emergence of a new payment instrument in the form of a certain amount of money stored in an electronic media owned by someone, this payment instrument is known as Electronic Money. As a means of payment, the acquisition and use of Electronic Money (e-money) can be considered quite easy. Prospective holders or users only need to deposit a certain amount of money to the issuer or through issuing agents and the total value of the money will be digitally stored in electronic media. The problems raised in this paper are regarding the characteristics and status of electronic money as a non-cash payment instrument in banking products and the urgency of legal protection against stored customer electronic money. This type of thesis research uses normative juridical research. The results of this study are that electronic money is essentially cash that is converted into electronic data that is stored on storage media on cards in the form of chips or servers belonging to electronic money holders. The value of the electronic money is also recorded on electronic media managed by the issuer of electronic money. Payment transactions with electronic money are carried out by transferring funds electronically at merchant payment terminals (merchant), by directly reducing the value of electronic money on electronic media managed by electronic money holders. The status of the value of money received by the electronic money issuer, both for the results of the electronic money issuance and refilling, is a float fund, which is the obligation of the electronic money issuer to electronic money holders and traders at the time of billing reconciliation by the merchant to the electronic money issuer and the urgency of guaranteeing funds Customers using electronic money by customer fund guarantee institutions (LPS) have not yet reached the point where they really need them. Because currently existing regulations regarding electronic money, both those regulated by Bank Indonesia Regulations and Financial Services Authority Regulations are still able to protect the rights of customers who use electronic money, but it is possible that in the future IDIC will guarantee the funds of electronic money customers. Considering the very rapid development of electronic money users and the very large circulation of money, then of course LPS can be present as a guarantee institution, of course with updated regulations. And at this time LPS is also reviewing with OJK about the need for LPS to be present as a guarantor of electronic money customer funds.

A Modigliani-Miller theorem for the public finances of globalized economies

In line with the capital structure irrelevance principle of Modigliani and Miller (1958), this article shows that when international capital allocation choices are determined by well-informed, deep-pocketed global financial investors, there are no net gains a government of a highly internationally financially integrated (“globalized”) economy can consistently extract from resorting to one type of deficit financing (say, debt) versus another (say, money) or by issuing debt in one form versus another. The article proves a new Neutrality Theorem whereby, in a globalized economy the cost of the capital needed by governments to finance their deficits is independent of whether: i) financing originates from debt or money, ii) debt is denominated in domestic or foreign currency, and iii) money and debt are issued under floating or fixed exchange rates. The theorem's two corollaries show that governments seeking to monetize their deficits must remunerate money holdings with a real return that varies inversely with credibility and directly with the stock of money The article points to areas for future research.

Bank payment cards as the main form of modern monetary relations and basis of money circulation

Introduction. Today, payment cards are a key tool for remote access of money holders to bank accounts and a means of moving funds through the financial sector, and therefore are the main driver of the organization of payment services. This allows to assert that the development of banking operations with payment cards is of fundamental importance for ensuring the smooth functioning of settlement systems, improving the mechanisms of monetary regulation and providing the economy with an adequate amount of means of payment, which decisively depends on the effective organization of money circulation in general. Due to the fact that payment cards are one of the most powerful tools that affect the structure of the country's entire payment circulation, the study of card payment systems and the market of payment instruments at the macro level is becoming increasingly important and relevant. Goal. The purpose of the article is to evaluate the modern role of bank payment cards as the main form of monetary relations, in connection with which there is a need to clarify the main trends in the development of the market of payment instruments. Methodology. General scientific techniques and tools, methods of analysis and synthesis, comparison, consolidation and grouping, scientific abstraction are used. Results. The current trends in the development of the payment system in the context of digitalization of the economy and virtualization of monetary relations, in which payment cards are a key tool for access to bank accounts and a means of moving funds, are analyzed. The role of payment cards as the basis of the modern settlement mechanism, which affects the structure of payment circulation, is considered, and the advantages of payment cards for all participants in settlement transactions are determined. The current trends in the development of the payment card market in Ukraine in terms of the number, volume and structure of card transactions are studied and systematized. The negative trends and problems accompanying transactions with payment cards are analyzed, and the directions of optimization of the settlement mechanism are determined.

Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman

<p class="MsoNormal" style="margin-top: 12.0pt;"><span lang="EN-US" style="mso-bidi-font-size: 10.5pt; font-family: 'Cambria',serif; mso-fareast-font-family: 宋体; mso-bidi-font-family: 'Times New Roman';">In his "The World’s smallest macroeconomic model” (Krugman (1999)), Paul Krugman argued that under the assumption of price rigidity, a shortage of money supply leads to underemployment or recession, so increasing money supply can eliminate underemployment and restore full employment. But, how do we increase the money supply? I will show that we need a government deficit to increase the money supply in order to restore full employment from recession. Also, I will show that in a growing economy, if people hold money, a government deficit is necessary to maintain full employment under constant price or inflation. A government deficit is not only effective in pulling the economy out of recession, it is even necessary for continued growth without inviting either recession or inflation. The government deficit in this paper represents the difference between government expenditures and government revenues. When the difference is positive, we say that the government has a deficit. This paper seeks to explore theoretically and normatively the role of government deficits in achieving and maintaining full employment in a growing economy without causing inflation, using a very simple model by Krugman.</span></p>

The macroeconomic implications of deficit financing under present bias

We examine how present bias affects deficit, inflation, and welfare in an economy where the deficit is funded by a seigniorage tax. In a hyperbolic discounting economy, reduced money holdings due to the desire for immediate consumption cause a decline in the sustainable deficit limit. To meet the targeted deficit, the government must raise seigniorage tax collection, especially with present bias. This results in increased inflation rates and higher welfare costs associated with the deficit for hyperbolic discounting individuals.

LEGAL PROTECTION OF CONSUMERS USING E-MONEY IN VIEW FROM LAW NUMBER 8 OF 1999 REGARDING CONSUMER PROTECTION

One of the problems that arise for consumers or electronic money holders is card damage. Card damage usually occurs in chip-based electronic money types. Damage to the card causes failure in payment transactions because electronic money cannot be read by the reader at the merchant where the transaction is made, resulting in a failed transaction. The type of research used in this discussion is normative juridical research, namely to provide an understanding that law is a statutory instrument that is regulatory in its implementation. Furthermore, the data obtained is presented descriptively and then analyzed qualitatively. The results of the study show that a form of legal protection for users of Electronic Money (e-money) for the loss of e-money cards so that they are used by unauthorized parties is the Consumer Protection Act which gives e-money users the right to file a claim for compensation to the district court. or Consumers can also bring this problem to the Consumer Dispute Settlement Agency (BPSK). The legal position of e-money users in filing lawsuits related to the Consumer Protection Act is that electronic money users are consumers in the banking sector, so they have rights and obligations in using e-money products.

The budget deficit in an endogenous growth model with bequest and money holdings

By an endogenous growth model with a two-period overlapping generations structure, I examine the existence of a budget deficit in an economy that endogenously grows by investments of firms. The consumers leave bequests to their descendants and hold money as a part of their savings. I use a Barro-type utility function, where people include the utility of their children in their own utility. The main results are as follows. 1) A budget deficit is necessary for full employment under constant prices. 2) Inflation is induced if the actual budget deficit is greater than the value at which full employment is achieved under constant prices. 3) If the actual budget deficit is smaller than the value which is necessary and sufficient for full employment under constant prices, a recession occurs. Therefore, a balanced budget cannot achieve full employment under constant prices. I do not assume that the budget deficit must later be made up by a budget surplus. I use a Barro-type utility function to prove the necessity (or inevitability) of a budget deficit instead of the neutrality of government debt. In the appendix of this paper, I show that if money, as well as goods, are produced by capital and labor, a budget deficit is not necessary for full employment under constant prices.

Inside the Black Box: Tools for Understanding Cash Circulation

In this study, we assess the main drivers of banknote circulation in Italy over the last decades by using a number of econometric tools proposed in the literature. We explore the role played by the banknote flows from abroad, changes in the institutional framework and disentangle domestic demand for transaction purposes from other components, including liquidity hoarding. We find that changes in legal limits on cash payment and money holdings for precautionary reasons explain the bulk of cash dynamics. Moreover, the share of transaction demand declined over time becoming of second-order. Finally, we find that, during the pandemic from Covid-19, the exceptional raise in cash circulation was mostly the result of an increase in precautionary demand due to both economic uncertainty and restrictions to mobility that resulted into a marked decline of lodgments to the central bank.

The Response and Results of Countries to the Fed's Rate Hike

Many financial institutions including Europe and Japan remained healthy during the global financial crisis, with deposits guaranteed by the federal government. The surge in demand for money did not have any destabilizing effects on the banking system. In fact, bank deposits also increased during this period. However, the rise in demand for money did cause some problems for the paper money distribution business. Traditional models of money demand suggest that interest rate cuts and federal stimulus payments to households have played a role in explaining the increase in money holdings. This study estimates that these factors account for only about 20% of the observed increase in currency holdings. The rest of the rise was likely due to increased precautionary holdings by people worried about the liquidity or solvency of financial institutions and as a contingency measure. It is in line with the disproportionate increase in demand for large-denomination. These results shed light on guiding further exploration of interest rates.

A Crypto Loan: Problems of Legal Qualification

The author considers the concept of «digital money». The paper analyzes the legal nature of various types of digital currency. Special attention is paid to the civil law regime of the cryptocurrency and the peculiarities of its property turnover in an information system using blockchain technologies. The paper examines the following complex debatable issues of civil law: 1. possibility of applying provisions on obligations to digital relations; 2. problems of protecting the rights of digital money holders; 3. enforcing restitution in the digital environment. The paper analyzes the design of a crypto loan using a centralized Binance Loan exchange. The author concludes that the actual algorithm for lending cryptocurrencies is similar to the mechanism of traditional transfer of things determined by generic characteristics applied to a loan. The conclusion is reasoned that such legal concepts as «transaction», «legal relationship», «obligation» and «contract» can only be applied to the interaction of participants in actual loan relations in the digital environment with a high degree of conditionality. It has been revealed that attempts to qualify cryptocurrency loan relations without taking into account the position of the legislator are premature. Currently, the actual relationship with cryptocurrency is not a legal relationship and it cannot be formalized by civil contracts. The paper determines the tasks the solution of which, according to the author, will serve to settle loan relations in the digital environment. In particular, the issues concerning legislative determination of the civil law regime of digital money, consolidation of digital legal facts, possibility of applying general provisions on obligations to digital relations need immediate resolution. It is proved that in order to guarantee the proper fulfillment of cyber loan obligations, it is necessary to establish rules for the functioning of information systems at the legislative level, to formalize requirements for their operators and determine the responsibility of the latter for the data safety and reliability of transactions.

Regulating Solicitor’s Clients’ Money: A Stitch in Time Saves Nine

In West Malaysia, solicitors are regulated under the Legal Profession Act 1976 (LPA). Pertaining to holding clients' money to perform the clients' instructions, the LPA empowers the Bar Council to enact rules under Section 78. Pursuant to the said power, Solicitors Account Rules 1990 (SAR) is enacted to regulate the the management and maintenance of clients' money hold by solicitors. However, SAR only provides a minimum rule on maintaining clients' money with no fund security and primarily based on trust and confidence in the solicitor's profession. Due to this fact, mismanagement and misappropriation of client's monies are expected, which some resulted in the solicitors charged for criminal breach of trust of clients' money under the Penal Code (Act 574). Nevertheless, no criminal action against a legal firm that misappropriated the client's money as a legal firm is not a legal entity under criminal law. This paper examines the legal firm's compliance in managing the client's money under the SAR. The paper employs a doctrinal method and applies a content analysis approach. The research concludes that there is in dire need of the monitoring compliance mechanism for the protection of clients’ money as adopted by other jurisdictions. This paper proposes an amendment to SAR, which incorporates the due diligence process to maintain the client's money and penalty provisions to ensure that solicitors compensate for any misappropriation of clients’ money.

Coexistence of Money and Interest-Bearing Bonds

This paper revisits how coexistence of money and bonds can make a society better off. For this purpose, a model is constructed in which payment instruments matter for settling real transactions and savings instruments matter because agents differ in how they discount future utility. Because bonds and money differ in their characteristics as payment and savings instruments, the model is able to explain the coexistence puzzle for an optimally chosen monetary policy. Such a policy trades-offs efficiency in financial markets, in which money is traded for bonds, with efficiency in goods markets, in which money is traded for a real good. Financial markets can achieve a better distribution of savings when agents are constrained by their money holdings, but this is bad for efficiency in goods markets. The former effect can dominate the latter so that optimal policy deviates from the Friedman rule.

Five Facts About the Money Holdings of Individuals and Firms

Five Facts About the Money Holdings of Individuals and Firms

Public spending, monetary policy and macroeconomic instability

AbstractWe analyze sunspot‐driven fluctuations in a standard neoclassical growth model with money holdings and public spending. In our economy, money is needed for transaction purpose, while public spending is financed through a flat income tax. Public spending includes an incompressible component and a variable part, and the latter exerts positive externalities on private utility or production. Our theoretical results show that the composition of public spending and externalities have important effects on local stability properties. First, in the absence of externalities, there is a unique steady state, and local indeterminacy depends on the interplay between the share of the cash‐in‐advance constraint and the intertemporal elasticity of substitution of consumption. Second, in the presence of externalities, multiple equilibria might emerge under weak enough production externality, while uniqueness of the steady state prevails under strong production or under consumption externality. We further show that weak production/consumption externality or strong consumption externality could generate local (in)determinacy of the steady state depending on the share of the cash‐in‐advance constraint while strong production externality generates local determinacy of the steady state. Finally, based on numerical examples, we show that an increase in the variable public spending and the income tax rate exert a local stabilizing effect while externalities promote locally the likelihood of local indeterminacy.

(In)Effective tax enforcement and demand for cash

Cash holdings have increased worldwide in recent years. It is well known that a higher tax burden is typically an important factor in explaining an increase in cash holdings. However, the role of tax enforcement is less known. To explore the effect of tax enforcement on cash holdings, we study fiscal reform carried out in a large, developing country. In mid-2013, Mexico tried to raise tax revenues by enrolling more taxpayers and introducing electronic invoices to counter a secondary market in illegal invoices. Based on a transaction-based model of money demand, we find an ambiguous effect of tougher tax enforcement on money holdings. If institutions are ineffective, the model predicts an increase in cash holdings after tougher enforcement. To test this issue empirically, we propose a vector error correction (VEC) specification for money demand. The results suggest that a tax enforcement policy implemented under a weak institutional framework can exacerbate cash holdings.

An Analysis of the Money Demand Function for Zambia: A Gregory Hansen Cointegration Approach

The objective of this study was to analyze the money demand function for Zambia for the period 1978 – 2018 using annual time series data. The study employed the Gregory Hansen cointegration technique. The study also employed Hendry’s General to Specific technique to estimate the error correction model by obtaining a parsimonious model. The results of the Gregory Hansen test confirmed the presence of a cointegrating relationship and selected the GH-2 model as the most plausible model with a level shift and a trend. The results also endogenously determined 1994 as the break year in the money demand function. Other interesting results obtained by the study suggest that inflation and interest rate are the robust determinants of real money demand both in the short and long run. Furthermore, unlike many other developing countries, the results show that money is a necessity in Zambia. The other interesting results suggested by the study are that the financial sector reforms of 1994 diminished the demand for real money; however, the positive time trend suggests that there has been an increase in real money holdings over time in Zambia. The low-interest elasticity of money demand also potentially compromises the effectiveness of money supply as a monetary policy tool for economic stabilization. The results of the CUSUM and CUSUMSQ confirm the stability of the money demand function in Zambia.

The Nature of Money in a Convertible Currency World

In a world where the means of exchange is convertible into the numeraire consumption good at a fixed rate, no one wants to hold money over time – and due to convertibility there is no means by which the Friedman rule can generate deflation. This is the environment we study in this paper in order to demonstrate that there is still a way to reach the first-best: institutionalize the naked shorting of the unit of account, or in other words establish a banking system.
 To motivate the benefits of a banking system, the environment has real productivity shocks that are constantly changing the optimal level of economic activity, so the optimal quantity of money is inherently stochastic. Efficiency in such an environment requires the capacity to expand the money supply on an “as needed” basis. We show how a debt-based payments system that relies on banks to certify the individual debtors’ IOUs addresses the monetary problem.
 This model explains (i) central bank monetary policy as a means of stabilizing the banking system and (ii) usury laws as means of promoting equilibria that favor non-banks over those that favor banks. Furthermore, by modeling a commercial bank-based monetary system as an efficient solution to a payments problem this paper develops a theoretic framework that may be used to evaluate central bank digital currency proposals.

On the monetary exchange with multiple equilibrium money holdings distributions: An experimental approach

Abstract In this study, we investigate a search model with divisible fiat money in a laboratory setting. In the model, there are multiple equilibria with various money holdings distributions. The purpose of this study is to investigate the behavior of subjects and the efficiency of endogenously determined money holdings distributions and transaction prices in this environment. We find that such endogenizing enhanced the coordination of subjects through monetary exchange. The subjects endogenously reduced the trade friction of monetary exchanges and chose relatively efficient money holdings distributions and transaction prices.

Optimal intervention in a random‐matching model of money

AbstractWe numerically find optimal transfer scheme in the Shi–Trejos–Wright model with extended upper bounds on money holdings. The choice of upper bound matters for the optimal policy as some potentially beneficial transfer schemes cannot be studied under small upper bounds. Money creation (and accompanying inflation) becomes optimal in more examples when the upper bound on money holdings is larger, and the type of optimal transfer depends on the parameters in utility function. This result is in line with the conjecture of Wallace, which says that there generically exists an inflation‐financed transfer scheme that improves welfare over no intervention in pure‐currency economies.