What is the potential impact of E-MONEY on MONETARY POLICY?

Question

Discuss the evolution of the payments system in the last century. Critically assess the potential impact of the most recent innovation, that is, e-money on monetary policy.

How do I address this topic in an organised manner talking about all issues concerned.???

Answer 1

E-money is still very much in its infancy but has
the potential to develop. In the euro area, various e-money
schemes exist. Although the volume of e-money in
circulation currently remains very low in the euro area, the
number of devices already in circulation suggests that usage
could expand rapidly (‘Issues arising from the emergence of
electronic money’, November 2000 edition of the Monthly
Bulletin of the ECB, p.49-60.) In this context, it was
important that the regulatory framework was clearly set up
at an early stage so as to reduce uncertainty. In my view, this
will encourage innovation. I am glad to say that the
framework adopted in the European Union has the
advantage of ensuring a high measure of security for
customers, in particular through providing protection
against counterfeiting and money laundering.
For monetary policy, there are three main issues arising
from the emergence of electronic money. First, it is
important that electronic money does not jeopardise the
unit of account function of money. In other words,
electronic euros stored on a payment card must have the
same value irrespective of when and by whom the card was
issued. This important principle has been safeguarded in
European legislation through the imposition of a
redeemability requirement for e-money. Second, monetary
policy must remain able to steer money market interest
rates. I believe that this will continue to be the case as long
as money market participants need to have recourse to the
central bank for providing the final means of settlement.
Third, electronic money, as a close substitute for banknotes
and coins, needs to be included in the definition of monetary
aggregates. Therefore, even though e-money currently
remains in its infancy, the ECB has started to collect data on
the amounts of electronic money in circulation.
Without going into further details on these issues, let me
emphasise that we are confident that electronic money will
not pose risks to the ECB in the pursuit of its objectives.
To conclude my remarks, I would just recall that, in
particular in the financial sphere, remarkable changes have
taken place already. Banks have developed new products
and services as well as new ways to commercialise them.
Financial markets have been transformed by the emergence
of electronic trading systems. These developments can be a
source of great benefits since they generally tend to
augment the range of options available to borrowers and
investors. This may contribute to a better allocation of
financial resources in the economy and, thereby, eventually
to higher economic growth. As in all periods of rapid
change, there are some risks associated with the
developments currently underway. However, I am
confident that these risks can be addressed satisfactorily,
allowing the euro area to reap the benefits of e-finance.

Answer 2

e-money does not differ very much from demand deposits in your checking account.

Those are still controlled by the open market mechanism of the Fed; I don't see much of a change down the road.