Electronic Money and Its Impact on Central Banking and Monetary Policy

Electronic Money and Its Impact on Central Banking and Monetary Policy â€Å"The term [electronic] money refers to various proposed electronic payment mechanisms designed for use by consumers to make retail payments. Digital money products have the potential to replace central bank currency† (Berentsen 1). This quote indicates that the advent of electronic money will have an impact on the banking system and monetary policy. While this topic is controversial it seems obvious that some changes will result and that there is no prefect answer to predict this new instruments affect on monetary aggregates and the role of central banks. Its growth will be based on many things: future technology, increased security, regulation, and ease of conversion. It can impact such variables as monetary supply, exchange rates, the money multiplier, velocity of money and seignorage. Increased reliance on electronic money as a substitute for currency will directly affect the central bank and its control over monetary aggregates and policies. Electronic money is the money balance recorded electronically on a â€Å"stored-value† card (Ely 1). These cards, â€Å"smart cards,† have a microprocessor embedded which can be loaded with a monetary value. Another form of electronic money is network money, â€Å"software that allows the transfer of value on computer networks, particularly the internet. Like a travelers check, a digital money balance is a floating claim on a private bank or other financial institution that is not linked to any particular account† (Berentsen 1-2). This money is issued by both public and private institutions worldwide and is raising concern about the future ability of central banks to set money supply targets. It is widely used in... ... Money and Monetary Policy: Separating Fact from Fiction.† The Future of Money in the Information Age, CATO Institute’s 14th Annual Monetary Conference. 23 May 1996. CATO Institute, 25 Nov. 2002 http://www.cato.org/moneyconf/14mc-2.html Seign, George. â€Å"E-money: Friend or Foe of Monetarism.† The Future of Money in the Information Age, CATO Institute’s 14th Annual Monetary Conference. 23 May 1996. CATO Institute, 25 Nov. 2002 Rahn, Dr. Richard W. â€Å"On the Future of Electronic Payments.† CATO Congressional Testimony. 19 Sep. 2000. CATO Institute, 25 Nov. 2002 Berentsen, Aleksander. â€Å"Digital Money, Liquidity, and Monetary Policy.† 1997. First Money, 25 Nov. 2002 http://www.firstmonday.dk/issues/issue2_7/berentsen/