| The main purpose of this dissertation is to identify the effect of financial innovation on the demand for money, in particular, focusing on the influence of credit card diffusion.; In the first chapter, the money demand literature is reviewed from the perspective of alternative theoretical models. We find that risk aversion factor for consumers at the point of sale is rarely used in the existing money demand literature associated with credit cards. In the second chapter, this risk factor is embedded in a theoretic choice model of cash and credit card in an economic environment where cash is dominated in rate of return but the riskiness of the credit cards backed by interest bearing deposits and derives money demand functions. Through empirical tests using a Korean time-series data and 22 country-panel data, I verify the main argument of the second chapter: credit card usage has a negative effect on currency balances. In addition, we find that the credit card usage has a positive effect on bank account balances. In particular, the credit card acceptability variable, a proxy variable for the financial innovation, plays a central role in the money demand relative to key traditional variables, such as incomes and interest rates.; I conclude that policymakers should consider the role of financial innovation such as delivered by credit cards when formulating monetary policy since credit card usage has a significant influence on the demand for money. |
