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Payment systems, inside money and financial intermediation
 
Author:Merrouche, Ouarda; Nier, Erlend; Collection Title:Policy Research working paper ; no. WPS 5445
Country:World; Date Stored:2010/10/13
Document Date:2010/10/01Document Type:Policy Research Working Paper
SubTopics:Bankruptcy and Resolution of Financial Distress; Access to Finance; Currencies and Exchange Rates; Banks & Banking Reform; Debt MarketsLanguage:English
Region:The World RegionReport Number:WPS5445
Volume No:1 of 1  

Summary: This paper assesses the impact of introducing an efficient payment system on the amount of credit provided by the banking system. Two channels are investigated. First, innovations in wholesale payments technology enhance the security and speed of deposits as a payment medium for customers and therefore affect the split between holdings of cash and the holdings of deposits that can be intermediated by the banking system. Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds, which reduces the need for banks to hold excess reserves. The authors examine these links empirically using payment system reforms in Eastern European countries as a laboratory. The analysis finds evidence that reforms led to a shift away from cash in favor of demand deposits and that this in turn enabled a prolonged credit expansion in the sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, this effect was not causal for the credit boom observed in these countries.

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