Content area
Full Text
Atl Econ J (2011) 39:8595
DOI 10.1007/s11293-010-9254-y
Bill Z. Yang & Amanda S. King
Published online: 12 January 2011# International Atlantic Economic Society 2011
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 66:545556, 1952 and Tobin Review of Economics and Statistics 38(3):241247, 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.
Keywords Aggregate money holdings . Credit card
JEL E40 . E41
Introduction
As the number of non-cash transactions moves more and more toward electronic forms of payment, it becomes more important to understand the impact that these
Bill Z. Yang Thank Mr. Joe Evans, the President and CEO of United Bankers, LLC for his first-hand information about the practice in credit card business as well as Richard Cebula, George Carter and the participants of the IEAS Annual Conference at Charleston, SC for their comments on an earlier version. The standard disclaimer applies as usual.
B. Z. Yang (*) : A. S. King
School of Economic Development, Georgia Southern University, Statesboro, GA, USA e-mail: [email protected]
Do Credit Cards Really Reduce Aggregate Money Holdings?
86 B.Z. Yang, A.S. King
media have on the economy. In 21 years, from 1979 to 2000, the percentage of non-cash transactions made with checks fell by 26.2 percentage points (Gerdes and Walton 2002). From 1983 to 1995 there was a 179% real increase in credit card borrowing (King 2004). These statistics confirm that changes in the ways households make purchases have been occurring in the economy. Given the magnitudes of these changes, we need to ask how the new payment methods impact...