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on Payment Systems and Financial Technology |
| By: | Frost, Jon; Rochet, Jean-Charles; Shin, Huyn Song; Verdier, Marianne |
| Abstract: | We compare three competing digital payment instruments: bank deposits, private stablecoins and central bank digital currencies (CBDCs). A simple theoretical model integrates the theory of two-sided markets and payment economics to assess the benefits of interoperability through a retail fast payment system organised by the central bank. We show an equivalence result between such a fast payment system and a retail CBDC. We find that both can improve financial integration and increase trade volume, but also tend to reduce the market shares of incumbent intermediaries. |
| Keywords: | payments; CBDC; big tech; banks; stablecoins |
| JEL: | E42 E58 G21 L51 O31 |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130555 |
| By: | Morshed, Monzur |
| Abstract: | This paper explores the dynamics of mobile money adoption and satisfaction in Kenya, using household survey data from the Research ICT Africa (RIA) series. The study examines demographic and socio-economic determinants of M-Pesa ownership and user satisfaction through logistic and Poisson regression models. Results suggest that traditional barriers such as gender, age, and education have limited influence on M-Pesa adoption and user satisfaction, indicating a narrowing digital divide. Although the intensity of mobile money usage is proxied by self-reported satisfaction scores rather than transaction frequency, the analysis highlights the platform’s widespread acceptance and usability. These findings carry important implications for the design and rollout of central bank digital currencies (CBDCs), particularly in low- and middle-income countries. Kenya’s experience with M-Pesa provides a valuable reference point for future digital currency innovations that are inclusive, trusted, and infrastructure-ready. |
| Date: | 2025–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:msbz4_v1 |
| By: | Song, Myungkoo (Korea Institute for Industrial Economics and Trade) |
| Abstract: | Roughly speaking, blockchain is a digital ledger that records transactions in a distributed database spread across multiple computers. Its decentralized nature enhances security, making blockchain-based platforms or applications highly resilient. In addition, by enabling a permanent, immutable, and transparent record of transactions, blockchain has the potential to foster trust without the need for intermediaries, especially in environments where trusted third parties are scarce. There is also growing interest in blockchain in the manufacturing sector. Manufacturers worldwide are currently navigating a complex landscape of challenges, including intense global competition, supply chain disruptions, and increasing demands for sustainability. South Korean manufacturers in particular are facing substantial headwinds due to the rise of Chinese manufacturers, global trade tensions, and a demographic crisis driven by low birth rates and an aging population. To address these challenges, firms are looking intensely at adopting emerging technologies such as blockchain, artificial intelligence (AI), and quantum computing. Manufacturing interest in blockchain owes to the technology’s ability to enhance data integrity and foster trust among parties. Firms also view the technology as a key to unlocking innovative solutions to the aforementioned industry challenges. In this paper, I explore the growth of the blockchain industry in South Korea and examine the potential of blockchain technology in the country’s manufacturing sector. First, I examine the current state of the country’s blockchain industry and its adoption in the manufacturing sector. Next, I analyze use cases and assess how blockchain can improve competitiveness in the sector. Finally, I discuss the role of government policy in facilitating blockchain integration to strengthen the competitiveness of the manufacturing sector further. |
| Keywords: | blockchain; ICT; digital technology; cryptocurrency; industrial blockchain; Bitcoin; manufacturing; decentralization; digital ledgers; Korean blockchain industry; advanced digital industry; South Korea; Korea Institute for Industrial Economics and Trade; KIET |
| JEL: | L60 L86 |
| Date: | 2025–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kieter:2025_007 |
| By: | Ivan Trubelik; Tomas Karhanek; Simona Malovana; Ales Michl |
| Abstract: | This paper analyzes the adoption and evolution of the instant payment system (IPS) in Czechia, focusing on its integration into the Czech Express Real Time Interbank Gross Settlement (CERTIS) system. Since 2018, CERTIS has enabled 24/7 CZK fund transfers, boosting transaction efficiency. Voluntary bank participation led to rapid uptake, and by 2024, IPS-participating banks handled over 90% of CERTIS client transactions, with 50% of interbank retail payments processed instantly. Czechia's IPS stands out for its seamless bank integration, high reliability, and flexible limits. It also outperforms priority payments for lower-value transactions. The paper explores future developments, including cross-border payments and links to central bank digital currencies. |
| Keywords: | CERTIS, instant payment system, real-time settlement, transaction efficiency |
| JEL: | E42 E58 G21 O33 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2025/4 |
| By: | Joseph Abadi; Markus K. Brunnermeier |
| Abstract: | develop a model to compare the governance of traditional shareholder-owned plat forms to that of platforms that issue tokens. The owners of a traditional platform have incentives to implement policies that extract rents from users. If the platform’s owners can commit to future policies, they can implement a more efficient outcome by issuing a token that offers claims on the platform’s services. Such a token alleviates conflicts of interest between the platform’s owners and its users, mitigating inefficiencies: a policy that benefits users increases the value of tokens and therefore the platform’s seignorage revenue. If the platform’s owners cannot commit to policies ex ante, however, they can achieve the same outcome by issuing a token that bundles claims on the platform’s ser vices with an ownership share (i.e., cash flow claims and voting rights). |
| Keywords: | Utility Tokens; Platforms; Decentralized Finance; Corporate Governance |
| JEL: | D4 D18 E40 G30 |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:100006 |
| By: | Efing, Matthias (HEC Paris); Huang, Yi (Bank for International Settlements (BIS)); Han, Ruobing (The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)); Sun, Qi (Shanghai University of Finance and Economics); Xu, Daniel Yi (Duke University) |
| Abstract: | Advertising plays a particularly crucial role in online marketplaces, where thousands of merchants offer similar products and compete for visibility and consumer attention. This study theoretically and empirically demonstrates that merchants on e-commerce platforms often engage in "underadvertising" due to financial constraints. By leveraging quasi-random variation in merchants' access to credit from a major platform lender, we establish that alleviating financial constraints leads to substantial increases in advertising expenditures, enhanced shop visibility among customers, and ultimately, accelerated sales growth. Notably, high-quality merchants with top customer ratings are especially likely to utilize platform credit to invest in advertising. |
| Keywords: | platform credit; platform lending; e-commerce |
| JEL: | G21 G23 L10 L81 M30 |
| Date: | 2025–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1542 |
| By: | Enache, Andreea; Rhodes, Andrew |
| Abstract: | We consider a setting in which a platform matches buyers and sellers, who then wish to transact with each other multiple times. The platform charges fees for hosting transactions, but also offers convenience benefits. We consider two scenarios. In one scenario, all transactions must occur on the platform; in the other scenario, buyers and sellers can disintermediate the platform after the first transaction, and do subsequent transactions offline. We find that the platform reacts to disintermediation by using a “front-loaded” pricing scheme, whereby it charges more for earlier transactions. We also show that sometimes the platform is better off when disintermediation is possible—because it can use disintermediation to screen users’ private information about their convenience benefits. Buyers are not necessarily better off when they can disintermediate, due to the way in which the platform adjusts its fees. |
| Keywords: | Platforms; disintermediation; convenience benefits; repeat transactions |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130557 |
| By: | Biais, Bruno; Rochet, Jean-Charles; Villeneuve, Stéphane |
| Abstract: | In our dynamic general equilibrium model, agents can invest in money and in a production technology exposed to shocks. If the government is non-benevolent and has a monopoly over money issuance it issues too much money, to finance excessive public expenditures. We study the effects of a cryptocurrency in limited supply but with crash risk. If the crash risk is not too large, competition from the cryptocurrency constrains the government’s monetary policy. If the government is non-benevolent, this constraint improves citizens welfare, but if the government is rather benevolent competition from the cryptocurrency can lower citizens’ welfare. |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:130554 |
| By: | Ashwin Kwatra (Intern, Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Lin Zhuo (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific) |
| Abstract: | This policy brief underscores the imperative of broadening the focus beyond mere financial inclusion to embracing a more comprehensive approach that enhances people’s financial resilience. At the heart of this transition lies the recognition of the interconnectedness between financial inclusion and resilience. Policymakers must integrate resilience-building objectives into existing financial inclusion frameworks, fostering an enabling environment that incentivizes the provision of products and services designed to enhance resilience. Empowering individuals and communities through financial education and literacy initiatives is central to building financial resilience. Equipping individuals with the knowledge and skills to manage financial risks effectively enhances their preparedness to navigate unexpected challenges and mitigate their impact. Additionally, promoting the adoption of digital financial technologies can improve accessibility and affordability, particularly for marginalized populations, further enhancing societal resilience in the face of shocks. Consumer protection and robust monitoring and evaluation mechanisms are integral to building financial resilience. Ensuring the integrity and fairness of financial products and services through effective consumer protection frameworks safeguards individuals from exploitation and promotes trust in the financial system. Moreover, rigorous monitoring and evaluation mechanisms are essential for assessing the effectiveness of resilience-building interventions and identifying areas for improvement. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:unt:pbmpdd:pb128 |
| By: | Kadel, Anurag |
| Abstract: | Modern AI agents pose serious challenges to trust, traceability, and compliance in digital systems. While foundation models are evolving rapidly, the systems they operate in often lack the guardrails needed to verify agent identity, ensure auditability, and align behavior with organizational or regulatory norms. We introduce VISTA (Verifiable Infrastructure for Secure & Transparent Agents), a modular framework that guarantees agent-level verifiability through five interoperable layers: Identity, Execution, Audit, Escalation, and Ethics. VISTA is designed for compatibility with centralized platforms, enabling institutions to embed decentralized trust checkpoints without sacrificing control. The architecture draws upon decentralized identifiers (Sporny et al., 2021), post-quantum cryptography (Chen et al., 2016), secure enclaves (Costan & Devadas, 2016), and hybrid blockchain principles (Marar & Marar, 2020). We simulate VISTA in a compliance agent use case to show how modular policy enforcement enhances accountability without introducing significant overhead. The framework aims to bridge emerging agent ecosystems with the need for trustworthy, auditable, and ethically aligned infrastructure. |
| Date: | 2025–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:apqzs_v1 |
| By: | Abdelaziz, Fatma; Abay, Kibrom A. |
| Abstract: | Digital innovations hold significant potential to address multiple forms of market failures. However, their adoption remains low and heterogenous across Africa. Smallholder farmers face significant barriers in accessing essential information, limiting their ability to seize market opportunities and enhance profitability. While numerous digital tools have been developed for farmers in the region, most are still in pilot phases. The landscape of digital agricultural innovations in Egypt, the focus of this study, presents a similar outlook, whereby the Egyptian market has an array of innovative digital study, presents a similar outlook, whereby the Egyptian market has an array of innovative digital agricultural tools that offer different services to farmers (including digital advisory agricultural and market services). Several demand and supply-side factors contribute to the low adoption of these digital innovations and their disparities among smallholder farmers in Africa and Egypt. On the supply side, the most important challenges include inadequate public and private investment in complementary infra-structure, unsustainable business models, and a misalignment in the pace of innovation. The most important demand-side challenges include lack of digital literacy, insufficient context-specific needs assessments, digital divide, and accessibility, usability, and user trust. User confidence and trust in digital tools is another important but understudied topic.. However, we lack empirically grounded evidence on alternative supply and demand-side interventions to enhance the adoption and scaling of digital innovations in various contexts, including Egypt. |
| Keywords: | agricultural technology; digital agriculture; digital innovation; smallholders; Egypt; Africa; Eastern Africa; Northern Africa |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:masprn:152495 |
| By: | Giulia Greco (London School of Hygiene and Tropical Medicine); Selim Gulesci (Department of Economics, Trinity College Dublin); Pallavi Prabhakar (BRAC Institute of Governance and Development); Munshi Sulaiman (BRAC Institute of Governance and Development) |
| Abstract: | We present evidence from a randomized controlled trial in Uganda where married women were randomly provided unconditional cash transfers. Among treated women, we randomized the modality of payment (in cash or mobile money) and whether the beneficiary's spouse was informed about the transfer or not. We find that using mobile money for cash transfers is more effective in improving women’s economic independence and decision-making power. In particular, women in the mobile money treatments have higher individual labor income and more of a say in household decisions. On the other hand, cash-based transfers are more effective in reducing intimate partner violence (IPV), especially when both partners are informed. This highlights a trade-off between improving the effectiveness of cash transfers on women’s economic empowerment versus reducing IPV. While providing cash transfers digitally is more effective in improving women's control over resources, this may lower their effectiveness in addressing IPV. |
| Keywords: | Digital finance, cash transfers, women's empowerment, domestic violence, privacy |
| JEL: | C93 D10 D82 J12 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:tcd:tcduee:tep0425 |
| By: | An, So Hyun (Korea Institute for Industrial Economics and Trade) |
| Abstract: | Technological advances change the industrial environment. Due to the development of digital technology, different markets are connected in real time and information and data travels over physical boundaries of markets. On top of that, the COVID-19 pandemic accelerated the pace of the digital economy’s expansion. In the highly online paradigm that emerged in the pandemic’s wake, digital technology enabled firms to adopt new ways of providing goods and services. Digital transformation has since progressed rapidly across all industries. Firms now view the digital transformation not as an option, but as a prerequisite to doing business. Digital transformation creates many opportunities for microenterprises. For one, it enables them to embrace opportunities to expand their markets and create new business models. Online storefronts and digital advertising, for example, are stepping stones to accessing the global market, and modern firms sell products utilizing diverse platforms. In this process, firms are able to gain a customer base and improve efficiency. However, microenterprises still lag in terms of digital transformation in almost all areas, and we know little about how they are adapting to the digital transformation. Most microenterprises face difficulties dealing with technological barriers and high initial costs and often lack necessary digital skills. Moreover, microenterprises often fail to understand the benefits of digital transformation and are slow to invest in digital transformation and adopt digital technologies. Furthermore, the current status of digital transformation among microenterprises is not being properly monitored as OECD (2021) pointed to a substantial lack of data and analyses on digital uptake by micro-firms. In this article, I examine the importance of microenterprises in the South Korean economy and analyze some of challenges they face in their pursuit of digital transformation. I then describe some of the implications carried for microenterprise policy. Finally, I briefly examine the current status of digital transformation among microenterprises, focusing on the adoption of e-commerce technology. |
| Keywords: | e-commerce; online shopping; digital transformation; DX; microenterprises; small-scale online retail; online retail; online retail platforms; South Korea; Korea Institute for Industrial Economics and Trade; KIET |
| JEL: | L81 |
| Date: | 2025–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kieter:2025_010 |
| By: | Ronald Heijmans; Ellen van der Woerd |
| Abstract: | This paper presents a methodology to detect potential failing participants in large value payment systems and measure the intraday impact of outages, considering Liquidity, Systemic, and Receiver Impacts. Medium and high risk thresholds are es- tablished to create a combined risk indicator. Outages of large banks can be detected within 10 minutes, while smaller banks may take over 30 minutes. Impact and risk levels vary by the size of the bank and the start time of the outage. Large banks can reach high-risk levels in 30 minutes, highlighting the need for timely detection, whereas smaller banks rarely reach high-risk levels. |
| Keywords: | Financial market infrastructures; TARGET2; liquidity risk; operational risk; systemic risk; financial stability |
| JEL: | E42 E50 E58 E59 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:836 |
| By: | Rashad Ahmed; Iñaki Aldasoro |
| Abstract: | This paper examines the impact of dollar-backed stablecoin flows on short-term US Treasury yields using daily data from 2021 to 2025. Estimates from instrumented local projection regressions suggest that a 2-standard deviation inflow into stablecoins lowers 3-month Treasury yields by 2-2.5 basis points within 10 days, with limited to no spillover effects on longer tenors. We also find evidence of asymmetric effects: stablecoin outflows raise yields by two to three times as much as inflows lower them. Decomposing the yield impact by issuer shows that USDT (Tether) has the largest contribution followed by USDC (Circle), consistent with their relative size. Our results highlight stablecoins' growing footprint in safe asset markets, with implications for monetary policy transmission, stablecoin reserve transparency, and financial stability. |
| Keywords: | stablecoins, treasury securities, money market funds, safe assets |
| JEL: | E42 E43 G12 G23 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1270 |
| By: | Michelle Müller (Paderborn University) |
| Abstract: | When individuals find themselves in dire financial circumstances, like a cash-flow crisis, some respond by committing acquisitive crime. Informed by macro strain theory, charitable crowdfunding, an IS-enabled funding process, has the potential to mitigate this risk by offering a coping mechanism for people under financial pressure. This paper empirically analyzes the relationship between charitable crowdfunding activity and acquisitive crime by combining data from GoFundMe with crime data from the FBI and socioeconomic information for US counties. The regression results reveal a significant negative relationship between the number of charitable crowdfunding campaigns and acquisitive crime, especially for burglaries, thefts, and motor vehicle-thefts. This relationship is more pronounced in counties with a higher proportion of residents on comparably higher incomes, higher education and lower unemployment. Consistent with macro strain theory, the results further suggest that charitable crowdfunding can reduce negative emotions of fundraisers like sadness and fear. These findings highlight the potential of charitable crowdfunding to alleviate societal problems, and are relevant not only to researchers and crowdfunding platform operators but also to policymakers. |
| Keywords: | Charitable Crowdfunding, Acquisitive Crime, Societal Impact of IS, Digital Divide, Macro Strain Theory |
| JEL: | O33 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:141 |
| By: | Magalhães, João C.; Keller, Clara Iglesias; Gorwa, Robert |
| Abstract: | This article examines Twitter’s mutation into X under Elon Musk, analyzing its shift from a mainstream platform to a far-right-aligned space. Using a dataset of over 1, 500 events related to this transformation and a novel conceptualization of institutional change in trust and safety systems, we argue that three processes characterized X’s approach to content moderation: the political simplification of Twitter’s governance ecosystem, the centralization of power in Musk’s hands, and the repurposing of governance mechanisms to enforce Musk’s personal ideology. Together, these processes resulted in what we conceptualize as platform illiberalism, an emerging regime whereby illiberal-esque logics reshape speech control internally while supporting illiberal actors externally. We argue that X represents an unprecedented fusion of social media and authoritarianism, with close ties to and potential implications for democratic erosion in the US and beyond. |
| Date: | 2025–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:6grbc_v2 |
| By: | José Fillat; Mattia Landoni; John Levin; J. Christina Wang |
| Abstract: | The private credit market has grown rapidly in recent years, approaching the lending volume of some traditional sources of business credit, including commercial and industrial loans from banks, broadly syndicated loans, and high-yield bonds. This brief looks at the role US banks have played in that growth and the implications for stability in the US financial system. |
| Keywords: | private credit; banking linkages; liquidity provision |
| JEL: | G20 G23 G32 |
| Date: | 2025–05–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbcq:99999 |
| By: | Sally Auld |
| Keywords: | central banks; monetary policy transmission; communications; forward guidance; transparency; trust |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2024-03 |
| By: | Bose, Joy |
| Abstract: | Use of Artificial Intelligence (AI) in financial services has shown rapid growth in India in the last couple of decades, thanks to the ability of AI to examine vast amounts of data, identify patterns and potential efficiency savings from using AI in automation. The major use cases of AI in the finance domain include automated credit scoring, fraud detection, insurance risk, algorithmic trading and investment advice including robo advisors. However, the law in India has been a bit slow in catching up with the multiple recent financial innovations involving AI. For example, India did not have an overarching privacy and data protection law until recently, when the Digital Personal Data Protection Act 2023 was passed. Fortunately, laws regulating finance in other countries such as GDPR in Europe and equivalent laws in USA and Singapore can serve as a model to enhance financial regulation in India. In this study, we first discuss important issues related to AI in finance related to bias, privacy, transparency, and ethics. Following a doctrinal and comparative legal methodology, we then study existing laws related to AI in finance in India and globally and identify missing areas in the current state of regulation of AI. We discuss a few landmark case studies in India and other countries related to legal aspects of AI in finance. Finally, we identify issues in existing Indian laws and make recommendations for a legal framework to handle the identified issues in AI in finance. Recommendations include mandating algorithmic transparency and explainability, introducing bias auditing and fairness testing, amending the DPDP Act to include automated decision rights, developing a risk-based AI regulatory framework, better regulatory capacity and industry self-governance. Only if lawmakers, regulators, and industry leaders effectively collaborate to meet the challenges, can we shape a fairer and dynamic financial AI ecosystem in India. |
| Date: | 2025–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:osf:lawarc:2my9a_v1 |
| By: | Laura Bisio; Valeria Cirillo; Matteo Lucchese; Andrea Mina; Stefania Scrofani |
| Abstract: | This study investigates the impact of new digital technologies on the resilience of firms to external shocks. Using rare comprehensive data on both the adoption of single and multiple new digital technologies, we employ a Difference-in-Differences methodology with propensity score matching to evaluate how digitalization influenced firms' ability to withstand the COVID-19 crisis. We isolate the effects of adopting 1) a single technology, 2) multiple technologies (the breadth of adoption), and 3) technologies that are complementary to one another. The findings provide novel insights into how firms can shape their investments in new digital technologies to increase the benefits of digitalization, and enhance their ability to navigate future crises. |
| Keywords: | digital technologies; resilience; technological complementarities |
| Date: | 2025–05–26 |
| URL: | https://d.repec.org/n?u=RePEc:ssa:lemwps:2025/21 |
| By: | Hongyang Yang; Likun Lin; Yang She; Xinyu Liao; Jiaoyang Wang; Runjia Zhang; Yuquan Mo; Christina Dan Wang |
| Abstract: | Enterprise Resource Planning (ERP) systems serve as the digital backbone of modern financial institutions, yet they continue to rely on static, rule-based workflows that limit adaptability, scalability, and intelligence. As business operations grow more complex and data-rich, conventional ERP platforms struggle to integrate structured and unstructured data in real time and to accommodate dynamic, cross-functional workflows. In this paper, we present the first AI-native, agent-based framework for ERP systems, introducing a novel architecture of Generative Business Process AI Agents (GBPAs) that bring autonomy, reasoning, and dynamic optimization to enterprise workflows. The proposed system integrates generative AI with business process modeling and multi-agent orchestration, enabling end-to-end automation of complex tasks such as budget planning, financial reporting, and wire transfer processing. Unlike traditional workflow engines, GBPAs interpret user intent, synthesize workflows in real time, and coordinate specialized sub-agents for modular task execution. We validate the framework through case studies in bank wire transfers and employee reimbursements, two representative financial workflows with distinct complexity and data modalities. Results show that GBPAs achieve up to 40% reduction in processing time, 94% drop in error rate, and improved regulatory compliance by enabling parallelism, risk control insertion, and semantic reasoning. These findings highlight the potential of GBPAs to bridge the gap between generative AI capabilities and enterprise-grade automation, laying the groundwork for the next generation of intelligent ERP systems. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.01423 |
| By: | Escribano Sáez, Álvaro; Rodríguez Solano, Juan Andres; Arranz Cuesta, Miguel Angel |
| Abstract: | Since the influential works of Friedman and Schwartz (1963, 1982) and Hendry and Ericsson (1991), on the monetary history of the United States of America and the United Kingdom from 1876 to 1975, there has been a great concern in the literature about the instability of money demand functions. This concern together with the results of the New Keynesian models, produced the abandonment of money as an instrument of monetary policy. Recently, using M1 as the measure of money, Benati, Lucas, Nicolini and Weber (2021) have shown, for a shorter and recent period of time, that there is a stable long-run money demand for a long list of countries. However, to date there are no studies showing that alternative stable longrun and short-run money demand equations exist since the XIX century. By means of nonlinear cointegration and nonlinear equilibrium corrections (NEC), we present empirical evidence of stable nonlinear UK money demands models of real broad money balances from 1877 to 2023. The properties of these NEC models are assessed via Monte Carlo simulations. Rational polynomials error-correction models are used to generate a simple nonlinear Granger´s representation theorem together with a two-step estimation procedure, which satisfies well-stablished asymptotic conditions. As a byproduct, with four different but stable money demand specifications, we empirically identify key abrupt historical periods, corresponding to World Wars I and II, regulatory changes and the COVID period, generating a common 6.5% excess inflation effect, over the historical 2.2% constant average inflation rate since 1877. |
| Keywords: | Money demand stability; Nonlinear cointegration; Nonlinear equilibrium correction; Nonlinear error correction; Rational polynomials; Opportunity cost of holding money |
| JEL: | E41 E43 E47 E51 |
| Date: | 2025–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:47122 |