Working Paper: CEPR ID: DP10183
Authors: Kim P. Huynh; Philipp Schmidt-Dengler; Helmut Stix
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 Codes: C35; C83; E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Acceptance (Y20) | Consumption Elasticity of Cash Demand (D12) |
| Ignoring Acceptance (D81) | Underestimation of Consumption Elasticity of Money Demand (E41) |
| Card Acceptance (E40) | Cash Demand (E41) |