The Role of Card Acceptance in the Transaction Demand for Money

41 Pages Posted: 6 Oct 2014

See all articles by Kim P. Huynh

Kim P. Huynh

Government of Canada - Bank of Canada; Indiana University Bloomington - Department of Economics

Philipp Schmidt-Dengler

University of Vienna - Faculty of Business, Economics, and Statistics

Helmut Stix

Oesterreichische Nationalbank - Economic Studies Division

Date Written: October 2014

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.

Keywords: counterfactual distributions, endogenous switching regression, inventory models of money

JEL Classification: C35, C83, E41

Suggested Citation

Huynh, Kim P. and Schmidt-Dengler, Philipp and Stix, Helmut, The Role of Card Acceptance in the Transaction Demand for Money (October 2014). Available at SSRN: https://ssrn.com/abstract=2506019

Kim P. Huynh (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Philipp Schmidt-Dengler

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Helmut Stix

Oesterreichische Nationalbank - Economic Studies Division ( email )

Otto-Wagner Platz 3
POB 61
Vienna 1011
Austria

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