Monetary Policy, Monetary Areas, and Financial Development with Electronic Money

IMF Working Papers, July 1, 2004

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Canonical URL: Monetary Policy, Monetary Areas, and Financial Development with Electronic Money

Electronic money (e-money), characterized as a network good, could become an important form of currency in the future.
Increased use of e-money could affect monetary policy effectiveness.
If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require:
- changes in the central bank operational target, and
- a closer coordination of monetary and fiscal policies.
The optimal size of monetary unions would be different under substantial e-money adoption.
At the current level of e-money use, there does not seem to be a threat to the stability of the financial system.
Conclusion: central banks can successfully implement the objectives of monetary policy given current e-money usage.

Monitor e-money adoption as a potential driver of reserve demand reduction.
Prepare contingency frameworks to:
- revise central bank operational targets if reserve demand falls substantially, and
- strengthen coordination mechanisms between monetary and fiscal authorities.
Re-evaluate monetary-union design parameters (optimal size) in light of possible widespread e-money adoption.

Focus on interactions among:
- monetary policy effectiveness,
- monetary-area (monetary union) optimal size, and
- financial development with electronic money.
E-money treated in the analysis as a network-good phenomenon influencing currency form and demand for central bank liabilities.