Whenever and Wherever: The Role of Card Acceptance in the Transaction Demand for Money

Huynh, Kim P., Schmidt-Dengler, Philipp and Stix, Helmut (22. August 2014): Whenever and Wherever: The Role of Card Acceptance in the Transaction Demand for Money. SFB/TR 15 Discussion Paper No. 472

Abstract

The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.

• Item Type: Paper
• Keywords: Bank notes; Econometric and statistical methods; E-money; Financial services.
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > C9 - Stabilität, Wettbewerb und Liquidität in Finanzmärkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: E41, C35, C83
• Language: English