Do Credit Cards Really Reduce Aggregate Money Holdings?

Bill Z. Yang, Amanda S. King

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

This paper discusses whether the use of credit cards reduces aggregate money holdings in an economy. Applying and modifying the Baumol-Tobin model (Baumol Quarterly Journal of Economics 66:545-556, 1952 and Tobin Review of Economics and Statistics 38(3):241-247, 1956), it studies how much money a credit card bank would normally maintain to support retail trade, and shows that whether or not the use of credit cards actually reduces the aggregate demand for money depends on how often consumers visit the bank and how long it takes to clear a check. With innovations in the banking industry such as ATMs, online banking, and other electric funds transfer services, the cost of visiting banks (i. e., switching funds between a checkable account and an interest-earning account) is now very low. For the whole economy, as a result, the use of credit cards may not necessarily reduce aggregate money holdings.

Original languageAmerican English
JournalAtlantic Economic Journal
Volume39
DOIs
StatePublished - Mar 1 2011

Disciplines

  • Business Administration, Management, and Operations
  • Finance
  • Finance and Financial Management
  • Economics

Keywords

  • Aggregate money holdings
  • Credit card

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