The effects of credit cards on money demand

As a recently expanded alternative technology for conducting transactions, credit cards have the potential to alter consumers' demand for money. A look at how credit cards have changed money balances spotlights the traditional monetary theme that transactions costs influence a consumer's level of liquid assets. Credit cards may change the timing of flows through these accounts, for example by replacing a continual outflow of money with discreet monthly card payments, in a way that offsets any reduction in the precautionary demand for money. An inventory management model of money holdings is analyzed for cases where the ability to aggregate transactions would have this positive impact on money holdings.; A cross-sectional study of family-level transactions account holdings explores the impact of credit card usage. Credit card usage is positively related to the dollar amount a consumer keeps in the sum of their checking and savings, ceteris paribus.; To examine the effects of the increase in credit card usage in the economy in general, time series regressions model revolving consumer credit against monetary aggregates, controlling for interest rates and economic growth. Revolving consumer credit usage has a positive effect on M1, which is consistent with my cross-sectional results, but has a negligible effect on M2.; To analysis the impact of increased liquidity from credit cards, revolving consumer credit outstanding was incorporated into a model of money holdings following a monetary policy shock. The price of consumer credit is relatively non-responsive to the change in the cost of funds following a monetary policy shock; revolving consumer credit provides an independently priced substitute for money balances. Higher levels of revolving consumer credit outstanding are associated with more transitory monetary policy shocks, indicating that the expansion of revolving consumer credit in the economy coincides with a decrease in consumer liquidity effects that propagated monetary policy shocks.