The E-Money Revolution: Challenges and Implications for Monetary Policy

Abstract:

The e-revolution promises to introduce new e-monies that may ultimately displace existing money. E-money poses a challenge to central banks’ ability to control interest rates, and it may also increase endogenous financial instability. The challenge to interest rate control stems from the possibility that e-money may diminish the financial system’s demand for central bank liabilities, rendering central banks unable to conduct meaningful open market operations. Increasedfinancial instability could emerge from the increased elasticity of private money production, and from periodic runs out of e-money into central bank money that generate liquidity crises.

Key Words::

• demand for central bank liabilities
• e-money
• monetary policy