nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒05‒27
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank By Bernd Hayo; Boris Hofmann
  2. Monetary Policy and Inflation Divergences in a Heterogeneous Monetary Union By Patrick Villieu; Nelly Gregoriadis; Florina Semenescu
  3. U.K. inflation targeting and the exchange rate By Christopher Allsopp; Amit Kara; Edward Nelson
  4. Regime changes and monetary stagflation By Edward S. Knotek II
  5. Optimal regional biases in ECB interest rate setting By Ivo J.M. Arnold
  6. Uncertainty and Monetary Policy Rules in the United States By Christopher Martin; Costas Milas
  7. Uncertainty and UK Monetary Policy By Christopher Martin; Costas Milas
  8. The Svensson versus McCallum and Nelson Controversy Revisited in the BMW Framework By Peter Bofinger; Eric Mayer
  9. The bond yield "conundrum" from a macro-finance perspective By Glenn D. Rudebusch; Eric T. Swanson; Tao Wu
  10. Time-varying U.S. inflation dynamics and the New-Keynesian Phillips curve By Kevin J. Lansing
  11. Increasing Returns to Scale and the Long-Run Phillips Curve By Andrea Vaona; Dennis Snower
  12. Is foreign exchange intervention effective? Some micro-analytical evidence from the Czech Republic By Antonio Scalia
  13. Inside and outside money By Ricardo Lagos
  14. Central bank intervention and exchange rate volatility, its continuous and jump components By Michel Beine; Jérôme Lahaye; Sébastien Laurent; Christopher J. Neely; Franz C. Palm
  15. Real-time model uncertainty in the United States: the Fed from 1996-2003 By Robert J. Tetlow; Brian Ironside
  16. Monetary Policy with Endogenous Firm Entry and Sticky Entry Costs By Tommaso Mancini Griffoli
  17. Do macro variables, asset markets, or surveys forecast inflation better? By Andrew Ang; Geert Bekaert; Min Wei
  18. Convergences of prices and rates of inflation By Fabio Busetti; Silvia Fabiani; Andrew Harvey
  19. Central bank intervention with limited arbitrage By Christopher J. Neely; Paul A. Weller
  20. Timing transitions between determinate and indeterminate equilibria in an empirical DSGE model: benefits and implications By Anatoliy Belaygorod; Michael J. Dueker
  21. Exchange Rates and External Adjustment: Does Financial Globalization Matter? By Philip Lane; Gian Maria Milesi-Ferretti
  22. Stock market fluctuations and money demand in Italy, 1913-2003 By Massimo Caruso
  23. Dynamic conditional correlation analysis of financial market interdependence: An application to Thailand and Indonesia By Kuper, Gerard H.; Lestano
  24. A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro By Lindblad, Hans; Sellin, Peter
  25. Fundamental volatility is regime specific By Ivo J.M. Arnold; Ronald MacDonald; Casper G. de Vries
  26. A Further Examination of the Expectations Hypothesis for the Term Structure By E Bataa; D R Osborn; D H Kim
  27. Debit card use by U.S. consumers: evidence from a new survey By Ron Borzekowski; Elizabeth K. Kiser; Shaista Ahmed

  1. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet MarburgAuthor-Name: Boris Hofmann); Boris Hofmann (Zentrum für Europäische Integrationsforschung, University of Bonn, Walter-Flex-Str. 3, D-53113 Bonn, Germany)
    Abstract: This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion.
    Keywords: Taylor rule, monetary policy, ECB, Bundesbank
    JEL: E5
    Date: 2005
  2. By: Patrick Villieu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Nelly Gregoriadis (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Florina Semenescu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: It is widely recognized that the Euro area is an asymmetric monetary union which assembles countries with heterogeneous structures on financial, goods and labour markets stricken by asymmetric shocks. However, the main objective of the European Central Bank (ECB) is to preserve price stability for the euro area as a whole, and the ECB pays most of its attention to union-wide output and (principally) inflation, neglecting, at least on the level of principles, inflation and output divergences in union. In this paper, we wonder, at a theoretical level, about the social loss associated with such an objective based on aggregate magnitudes, and we search for solutions, namely an “optimal” contract for a common central bank. We show in particular that it is not necessarily a good thing that a common central bank worries about inflation divergences without being concerned about output divergences in union.
    Keywords: Monetary Policy ; Monetary Union ; Heterogeneity, Optimal Contract ; Inflation Divergences
    Date: 2006–05–23
  3. By: Christopher Allsopp; Amit Kara; Edward Nelson
    Abstract: The United Kingdom*s monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index; and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. We argue that it is appropriate to model imports as intermediate goods rather than as goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy, while also offering a sustainable explanation fore the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target.
    Keywords: Inflation (Finance) - Great Britain ; Foreign exchange rates - Great Britain
    Date: 2006
  4. By: Edward S. Knotek II
    Abstract: This paper examines whether monetary shocks can consistently generate stagflation in a dynamic, stochastic setting. I assume that the monetary authority can induce transitory shocks and longer-lasting monetary regime changes in its operating instrument. Firms cannot distinguish between these shocks and must learn about them using a signal extraction problem. The possibility of changes in the monetary regime greatly improves the ability of money to generate stagflation. This is true whether the regime actually changes or not. If the monetary regime changes on average once every ten years, stagflation occurs in 76% of model simulations. The intuition for this result is simple: increased output volatility due to learning coupled with inflation inertia produce conditions conducive to the emergence of stagflation. The incidence of stagflation can be reduced by a stable, transparent central bank.
    Keywords: Inflation (Finance) ; Recessions ; Monetary policy
    Date: 2006
  5. By: Ivo J.M. Arnold (Nyenrode Business Universiteit)
    Abstract: This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country’s weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.
    Keywords: EMU, Taylor rule; Optimal monetary poli
    Date: 2005
  6. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Department of Economics)
    Abstract: This paper analyses the impact of uncertainty on monetary policy rules in the US since the early 1980s. Extending the Taylor rule to allow the response of interest rates to inflation and the output gap to depend on uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behaviour of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy.
    Keywords: Monetary policy, Uncertainty.
    JEL: C51 C52 E52 E58
    Date: 2005–07
  7. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Department of Economics)
    Abstract: This paper provides empirical evidence on the response of monetary policymakers to uncertainty. Using data for the UK since the introduction of inflation targets in October 1992, we find that the impact of inflation on interest rates is lower when inflation is more uncertain and is larger when the output gap is more uncertain. These findings are consistent with the predictions of the theoretical literature. We also find that uncertainty has reduced the volatility but has not affected the average value of interest rates and argue that monetary policy would have been less passive in the absence of uncertainty.
    Keywords: Monetary policy, uncertainty
    JEL: C51 C52 E52 E58
    Date: 2005–02
  8. By: Peter Bofinger; Eric Mayer
    Abstract: This note shows that the Svensson versus McCallum and Nelson controversy battled in the Federal Reserve Bank of St. Loius Review (September/ October 2005) can be mapped into a static version of a New Keynesian macro model that consists of an IS-equation, a Phillips curve and an inflation targeting central bank (e.g., Bofinger, Mayer, Wollmershäuser, (2006); Walsh (2002)). As a contribution to literature we supplement the controversy by a forceful graphical analysis. The general debate centers on the question by which notion monetary policy should be implemented. The two sides have fundamentally opposite views on this issue. Svensson argues for targeting rules as a notion of optimal monetary policy, whereas McCallum and Nelson promote simple instrument rules. In this note we systematically analyze these two categories of monetary policy rules. In particular we show that the rule discussed by McCallum and Nelson (2005) imposes different degrees of variability on the economy compared to a targeting rule when monetary policy falls prey to measurement error. To our opinion the hybrid Taylor rule developed by McCallum and Nelson contradicts the original idea of simple rules as a heuristic for monetary policy making and should be rebutted for practical reasons
    Date: 2006
  9. By: Glenn D. Rudebusch; Eric T. Swanson; Tao Wu
    Abstract: In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a "conundrum." We document the extent and timing of this conundrum using two empirical no-arbitrage macro-finance models of the term structure of interest rates. These models confirm that the recent behavior of long-term yields has been unusual--that is, it cannot be explained within the framework of the models. Therefore, we consider other macroeconomic factors omitted from the models and find that some of these variables, particularly declines in long-term bond volatility, may explain a portion of the conundrum. Foreign official purchases of U.S Treasuries appear to have played little or no role.
    Keywords: Monetary policy - United States ; Federal funds rate ; Treasury bonds
    Date: 2006
  10. By: Kevin J. Lansing
    Abstract: This paper introduces a form of boundedly-rational expectations into an otherwise standard New-Keynesian Phillips curve. The representative agent's forecast rule is optimal (in the sense of minimizing mean squared forecast errors), conditional on a perceived law of motion for inflation and observed moments of the inflation time series. The perceived law of motion allows for both temporary and permanent shocks to inflation, the latter intended to capture the possibility of evolving shifts in the central bank's inflation target. In this case, the agent's optimal forecast rule defined by the Kalman filter coincides with adaptive expectations, as shown originally by Muth (1960). I show that the perceived optimal value of the gain parameter assigned to the last observed inflation rate is given by the fixed point of a nonlinear map that relates the gain parameter to the autocorrelation of inflation changes. The model allows for either a constant gain or variable gain, depending on the length of the sample period used by the agent to compute the autocorrelation of inflation changes. In the variable-gain setup, the equilibrium law of motion for inflation is nonlinear and can generate time-varying inflation dynamics similar to those observed in long-run U.S. data. The model's inflation dynamics are driven solely by white-noise fundamental shocks propagated via the expectations feedback mechanism; all monetary policy-dependent parameters are held constant.
    Keywords: Inflation (Finance) ; Phillips curve ; Econometric models
    Date: 2006
  11. By: Andrea Vaona; Dennis Snower
    Abstract: A growing body of empirical evidence shows that there exists a long-run positive tradeoff between inflation and real macroeconomic activity. Within a New Keynesian framewok, we examine how increasing returns generate a positive long-run relation between inflation and output.
    Keywords: Phillips curve, Inflation, Increasing returns, nominal inertia, monetary policy
    JEL: E3 E20 E40 E50
    Date: 2006–05
  12. By: Antonio Scalia (Banca d’Italia)
    Abstract: I estimate a two-equation system on the euro-Czech koruna exchange rate and order flow at hourly frequency within the framework of Evans-Lyons (JME 2002). I use transac-tions data from the Reuters Spot Matching market in the second half of 2002, during which the Czech National Bank conducted discreet interventions to stem the appreciation of the domestic currency. I find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per €10 million, of which 80 percent persists through the day. The news of intervention increases the price impact of order flow by 3.9 basis points per €10 million, consistently with the notion of intervention efficacy. The order flow equation yields in-conclusive results.
    Keywords: Foreign exchange, central bank intervention, Czech koruna, ERM II, empirical microstructure
    JEL: E65 F31 G15
    Date: 2006–02
  13. By: Ricardo Lagos
    Abstract: A distinction is drawn between outside money—money that is either of a fiat nature or backed by some asset that is not in zero net supply within the private sector—and inside money, which is an asset backed by any form of private credit that circulates as a medium of exchange.
    Date: 2006
  14. By: Michel Beine; Jérôme Lahaye; Sébastien Laurent; Christopher J. Neely; Franz C. Palm
    Abstract: We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we decompose exchange rate volatility into two major components: a continuously varying component and jumps. Some coordinated interventions affect the temporary (jump) part of the volatility process. Most coordinated operations are associated with an increase in the persistent (continuous) part of exchange rate volatility.
    Date: 2006
  15. By: Robert J. Tetlow; Brian Ironside
    Abstract: We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model's inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. We also find that previous findings that simple rules are robust to model uncertainty may be an overly sanguine conclusion.
    Keywords: Monetary policy ; Uncertainty ; Economic forecasting
    Date: 2006
  16. By: Tommaso Mancini Griffoli (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper builds a monetary model where firm entry is endogenous, thereby exposing a new channel for the transmission of monetary policy. Individuals have a choice between consuming or investing in new firms by financing a sunk entry cost. Monetary policy shocks affect the cost-benefit analysis of creating new firms, and generate persistent as well as hump-shaped responses of consumption, investment, output and new firm entry, as observed in the data. These results lie on an endogenous source of inertia and are obtained despite minimal nominal rigidities, as only entry costs are assumed to be sticky.
    Keywords: Monetary policy, firm entry, sunk entry costs, investment, sticky prices, New Keynesian models.
    JEL: E37 E40 E52 L16
    Date: 2006–04
  17. By: Andrew Ang; Geert Bekaert; Min Wei
    Abstract: Surveys do! We examine the forecasting power of four alternative methods of forecasting U.S. inflation out-of-sample: time series ARIMA models; regressions using real activity measures motivated from the Phillips curve; term structure models that include linear, non-linear, and arbitrage-free specifications; and survey-based measures. We also investigate several methods of combining forecasts. Our results show that surveys outperform the other forecasting methods and that the term structure specifications perform relatively poorly. We find little evidence that combining forecasts produces superior forecasts to survey information alone. When combining forecasts, the data consistently places the highest weights on survey information.
    Date: 2006
  18. By: Fabio Busetti (Bank of Italy); Silvia Fabiani (Bank of Italy); Andrew Harvey (Cambridge University)
    Abstract: We consider how unit root and stationarity tests can be used to study the convergence properties of prices and rates of inflation. Special attention is paid to the issue of whether a mean should be extracted in carrying out unit root and stationarity tests and whether there is an advantage to adopting a new (Dickey-Fuller) unit root test based on deviations from the last observation. The asymptotic distribution of the new test statistic is given and Monte Carlo simulation experiments show that the test yields considerable power gains for highly persistent autoregressive processes with relatively large initial conditions, the case of primary interest for analysing convergence. We argue that the joint use of unit root and stationarity tests in levels and first differences allows the researcher to distinguish between series that are converging and series that have already converged, and we set out a strategy to establish whether convergence occurs in relative prices or just in rates of inflation. The tests are applied to the monthly series of the Consumer Price Index in the Italian regional capitals over the period 1970-2003. It is found that all pairwise contrasts of inflation rates have converged or are in the process of converging. Only 24% of price level contrasts appear to be converging, but a multivariate test provides strong evidence of overall convergence.
    Keywords: Dickey-Fuller test, initial condition, law of one price, stationarity test
    JEL: C22 C32
    Date: 2006–02
  19. By: Christopher J. Neely; Paul A. Weller
    Abstract: Shleifer and Vishny (1997) pointed out some of the practical and theoretical problems associated with assuming that rational speculation would quickly drive asset prices back to long-run equilibrium. In particular, they showed that the possibility that asset price disequilibrium would worsen, before being corrected, tends to limit rational speculators. Uniquely, Shleifer and Vishny (1997) showed that “performance-based asset management” would tend to reduce speculation when it is needed most, when asset prices are furthest from equilibrium. We analyze a generalized Shleifer and Vishny (1997) model for central bank intervention. We show that increasing availability of arbitrage capital has a pronounced effect on the dynamic intervention strategy of the central bank. Intervention is reduced during periods of moderate misalignment and amplified at times of extreme misalignment. This pattern is consistent with empirical observation.
    Date: 2006
  20. By: Anatoliy Belaygorod; Michael J. Dueker
    Abstract: We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). This feature is useful because DSGE models generally are estimated with data sets that include the Great Inflation of the 1970s and the surrounding low inflation periods. Timing the transitions between determinate and indeterminate equilibria is one of the key contributions of this paper. Moreover, by letting the data provide estimates of the state transition dates and allowing the estimated structural parameters to be the same across determinacy states, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the states. In particular, we find that positive interest rate shocks were inflationary under indeterminacy. While the change-point treatment of indeterminacy is applicable to all estimated linear DSGE models, we demonstrate our methodology by estimating the canonical Woodford model with a time-varying inflation target. Implementation of the change-point methodology coupled with Tailored Metropolis-Hastings provides a highly efficient Bayesian MCMC algorithm. Our prior-posterior updates indicate substantially lower sensitivity to hyperparameters of the prior relative to other estimated DSGE models.
    Keywords: Equilibrium (Economics) - Mathematical models ; Econometric models - Evaluation
    Date: 2006
  21. By: Philip Lane; Gian Maria Milesi-Ferretti
    Abstract: This paper addresses the implications of financial globalization for exchange rate behavior. We highlight two dimensions: first, a wider dispersion in net foreign asset positions implies stronger long-term trends in real exchange rates; second, the impact of currency movements on net external wealth is an increasing function of the scale of international balance sheets.
    Keywords: Financial integration, exchange rates
    JEL: F31 F32
    Date: 2006–05–22
  22. By: Massimo Caruso (Bank of Italy)
    Abstract: This paper examines the impact of stock market fluctuations on money demand in Italy taking a long-run perspective. The empirical findings suggest that stock market fluctuations contribute to explain temporary movements in the liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long-run relationship is unstable. In a dynamic, short-term specification of money demand the estimated coefficient on deflated stock prices is positive, thus compatible with a wealth effect, in the years 1913-1980, while in the last two decades a substitution effect prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalisation. Moreover, in the recent period stock market turnover and money growth are positively correlated.
    Keywords: long-run money demand function, asset prices volatility
    JEL: E41 E44 N14 N24
    Date: 2006–02
  23. By: Kuper, Gerard H.; Lestano (Groningen University)
    Abstract: This paper examines the dynamic linkages among financial markets in Thailand and Indonesia. In particular, we focus on the cross-border relationship in individual markets and on the relationship between finan- cial markets within each country. We find that while tight monetary policy pursued by Thailand authorities helped to defend the exchange rate at the outbreak of the financial crisis, it had little consequences for Indonesia at the end of 1998. The correlations between countries within each of the financial market reveals a certain degree of interde- pendence among countries, which is lower during crises.
    Date: 2006
  24. By: Lindblad, Hans (Sveriges Riksdag); Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately.
    Keywords: Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model
    JEL: C32 E31 F31 F41
    Date: 2006–05–01
  25. By: Ivo J.M. Arnold; Ronald MacDonald; Casper G. de Vries (Nyenrode Business Universiteit)
    Abstract: A widely held notion holds that freely floating exchange rates are excessively volatile when judged against fundamentals and when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar is chosen as the numeraire currency. We also argue, and indeed demonstrate, that in cross-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed rates.
    Keywords: Exchange rates; Exchange rate regimes; Excess volatility.
    Date: 2006
  26. By: E Bataa; D R Osborn; D H Kim
    Abstract: We extend the vector autoregression (VAR) based expectations hypothesis tests of term structure using recent developments in bootstrap literature. Firstly, we use wild bootstrap to allow for conditional heteroskedasticity in the VAR residuals without imposing any parameterization on this heteroskedasticity. Secondly, we endogenize the model selection procedure in the bootstrap replications to reflect true uncertainty. Finally, a stationarity correction is introduced which is designed to prevent finitesample bias adjusted VAR parameters from becoming explosive. When the new methodology is applied to extensive US zero coupon term structure data ranging from 1 month to 10 years, we find less rejections for the theory in a subsample of Jan 1982-Dec 2003 than in Jan 1952-Dec 1978, and when it is rejected it occurs at only the very short and long ends of the maturity spectrum, in contrast to the U shape pattern observed in some of the previous literature.
    Date: 2006
  27. By: Ron Borzekowski; Elizabeth K. Kiser; Shaista Ahmed
    Abstract: Debit card use at the point of sale has grown dramatically in recent years in the U.S., and now exceeds the number of credit card transactions. However, many questions remain regarding patterns of debit card use, consumer preferences when using debit, and how consumers might respond to explicit pricing of card transactions. Using a new nationally representative consumer survey, this paper describes the current use of debit cards by U.S. consumers, including how demographics affect use. In addition, consumers' stated reasons for using debit cards are used to analyze how consumers substitute between debit and other payment instruments. We also examine the relationship between household financial conditions and payment choice. Finally, we use a key variable on bank-imposed transaction fees to analyze price sensitivity of card use, and find a 12 percent decline in overall use in reaction to a mean 1.8 percent fee charged on certain debit card transactions; we believe this represents the first microeconomic evidence in the United States on price sensitivity for a card payment at the point of sale.
    Date: 2006

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