Monetary Policy Implementation: Past, Present and Future – Will Electronic Money Lead to the Eventual Demise of Central Banking?

This paper examines the ways in which central banks influence the very short‐term interest rate in regimes with and without reserve requirements. It then examines the implications for monetary policy implementation of the spread of electronic money and the potential for other mechanisms to compete with settlement arrangements at central banks. It concludes that it is extremely unlikely that electronic money will displace bank notes or the settlement services that are offered by central banks in the foreseeable future. Moreover, even in the extremely unlikely case that the spread of stored‐value cards leads to the elimination of bank notes and that the development of network money permits alternative settlement services to be offered that effectively competes with central bank services, central banks would very likely be able to continue to influence the very short‐term rate of interest. They would therefore be able to maintain their influence over aggregate demand and inflation even in such circumstances.