Monitoring Money for Price Stability
In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the ...
U.S. consumer holdings and use of $1 Bills
Small denominations play a special role in a payments ecosystem because they facilitate exchange for small-value goods and services. This report examines the $1 bill holdings of adults in the United States using data from the Diary of Consumer Payments Choice (DCPC). Simply knowing the number of $1 bills in circulation is not useful for understanding consumers' actions, since many of these bills are held by merchants. The costs and benefits to the consumer of carrying $1 bills have been largely ignored in the policy discussion of the costs of switching from dollar notes to dollar coins. ...
The efficiency of private e-money-like systems: the U.S. experience with state bank notes
In the United States prior to 1863, each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes. It examines historical evidence on how well the bank notes?a privately issued currency system with multiple issuers?functioned with respect to ease of transacting, counterfeiting, safety, overissuance, and par exchange. It finds that bank notes made transacting easier and were not subject to overissuance. However, counterfeiting of bank notes was ...
Integrated household surveys: an assessment of U.S. methods and an innovation
We present a vision for improving household financial surveys by integrating responses from questionnaires more completely with financial statements and combining them with payments data from diaries. Integrated household financial accounts?-balance sheet, income statement, and statement of cash flows?-are used to assess the degree of integration in leading U.S. household surveys, focusing on inconsistencies in measures of the change in cash. Diaries of consumer payment choice can improve dynamic integration. Using payments data, we construct a statement of liquidity flows: a detailed ...
International Evidence on Long-Run Money Demand
We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily ...
The Welfare Costs of Inflation
We revisit the estimation of the welfare costs of inflation originating from lack of liquidity satiation. We use data for the United States and several other developed countries. Our computations are heavily influenced by the recent experience of very low, even negative, short-term rates observed in the countries we study. We obtain estimates that range between 0.20% and 1.5% of lifetime consumption for the United States and find even higher values for some European countries.
Costs and benefits of building faster payment systems: the U.K. experience and implications for the United States
This paper studies the economic cost-benefit analysis behind the decision by the United Kingdom on how to implement its Faster Payments Service (FPS), which allows consumers and businesses to rapidly transfer money between bank accounts, and draws implications for the U.S. payments system.
U.S. consumers' holdings and use of $100 bills
Conventional wisdom asserts that $100 bills are often associated with crime and foreign cash holdings, leading some commentators to call for their elimination; in light of this proposal, it is useful to examine the legal, domestic use of cash. This report uses new data from the 2012 Diary of Consumer Payment Choice (DCPC) to evaluate consumer use of $100 bills as a means of payment.
This is what's in your wallet... and here's how you use it
Models of money demand, in the Baumol (1952)-Tobin (1956) tradition, describe optimal cash management policy in terms of when and how much cash to withdraw, an (s, S) policy. However, today, a vast array of instruments can be used to make payments, opening additional ways to control cash holdings. This paper utilizes data from the 2012 Diary of Consumer Payment Choice to simultaneously analyze payment instrument choice and withdrawals. We use the insights in Rust (1987) to extend existing models of payment instrument choice into a dynamic setting to study cash management. Our estimates show ...
Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions
This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast ...