Sumei Luo
Guangyou Zhou
Guangyou Zhou
2,* and
Jinpeng Zhou
Jinpeng Zhou
School of Finance, Shanghai University of Finance and Economics, Shanghai 200433, China School of Economics, Fudan University, Shanghai 200433, China Author to whom correspondence should be addressed. Mathematics 2021, 9(20), 2614; https://doi.org/10.3390/math9202614Submission received: 22 September 2021 / Revised: 13 October 2021 / Accepted: 14 October 2021 / Published: 17 October 2021
(This article belongs to the Special Issue Statistical Methods in Economics)Starting with the interactive relationship between electronic money and household consumption stimuli, this paper deeply analyzes the changes in the behavior of each monetary subject under the impact of electronic money, and establishes a DSGE model based on the three economic sectors of family, commercial bank and central bank under the New Keynesian framework. On this basis, the impact of electronic money on savings, loans, output and the interest rate, and its impact on monetary policy, are described by numerical simulation. The simulation results show that: (1) electronic money has asymmetric effects on savings and loans, but an irrational deviation on households; (2) the influence of electronic money on the interest rate has a reverse effect, and the “inverse adjustment” of the interest rate increases the management difficulty of the micro subject to a certain extent, and affects the effectiveness of monetary policy; (3) the regulatory effect of price monetary policy is better than that of quantitative monetary policy, and electronic money has the effect of its risk restraining impact. Finally, based on the analysis, this paper gives policy recommendations.
Keynes created the basic framework of modern macroeconomics, but he did not establish a direct logically consistent relationship between the optimal decision making of micro-individuals and aggregate economic behavior. The parameters controlling the structural equation in the econometric model based on Keynesianism have changed, causing its predictability and explanatory power to collapse. In Keynes’s model, the formation of expectations is placed in the field of psychology instead of economics. The policy analysis does not fully consider the impact of policy changes on people’s expectations; that is, the Lucas’ critique. With the gradual development of economics, based on micro and macroeconomic theories, a dynamic stochastic general equilibrium (DSGE) model that uses dynamic optimization methods to examine the decisions of various actors (households, manufacturers, etc.) has emerged. The DSGE model has obvious structural characteristics in terms of the model setting, derivation of behavior equations, determination of parameters, identification of shocks, dynamic characteristics of the model and expected formation mechanism, etc., so the model exhibits neoclassical economics in the long term. The explicit modeling framework can truly enable the model to be communicated and improved between developers and users, and the simulation and prediction results of the model can be understood and trusted. In recent years, an increasing number of literatures are making use of the dynamic stochastic general equilibrium (DSGE) model to study the impact of various factors on the macro-economy and monetary policy [1,2,3,4,5,6,7,8]. With the rapid development and popularization of electronic money, an online mode not only provides convenience for payments, but also imperceptibly changes people’s payment habits and consumption behavior. It also brings unprecedented challenges to traditional financial theory, especially the impact on monetary policy [9]. At present, there is no unified definition of e-money in academia. A more authoritative one is the definition issued by the Basel Committee in 1998; that is, e-money refers to the “stored value” and is “paid” in the retail payment mechanism, through sales terminals, between different electronic devices and on open networks (such as the Internet), which is a prepayment mechanism. “Stored value” refers to the value stored in physical media (hardware or card media) that can be used for payment, such as smart cards and multi-function credit cards. A prepayment mechanism is a set of electronic data that exists in a particular piece of software or network that can be transmitted and used for payment [10]. Although this definition was made 22 years ago, there have been many definitions of electronic money, which were still controversial. The definition issued by the Basel Committee in 1998 has been quoted by scholars and regarded as the most authoritative and representative definition of electronic money. Therefore, we also chose to use this definition. The electronic money studied in this paper was a kind of “secondary” currency, which was the electronic money replacing the traditional currency. However, it had a one-to-one correspondence with the legal tender issued by the central bank, which was not a decentralized digital currency (such as Bitcoin). Compared with traditional money, electronic money is fast, low-cost, easy to carry, easy to preserve, has a high security and allows for long-distance payment, so it is favored by people. During the special period of the COVID-19 pandemic, more people tend to “shop online” and use “non-contact” electronic payment methods to reduce going out and gathering, reduce the use of banknotes and coins and block the spread of the epidemic. In addition, in the context of current green finance and sustainable development, electronic money will also become a more environmentally friendly and reliable payment method in the future [11].
Although many factors may affect monetary policy, under the conditions of electronic money circulation, electronic money mainly affects monetary policy by influencing three monetary actors—consumers, commercial banks and central banks—and the impact of electronic money is mainly manifested in those three aspects. First of all, for consumers, the characteristics of electronic money make their daily transactions safe and convenient, and customers do not need to go out. This allows for them to complete the transfer of funds through online media, shortening the delivery time of payment instructions, improving the efficiency of capital operation and greatly reducing the “sole cost”. Second, for commercial banks, under the condition of electronic money, commercial banks can be a fast, low-cost way of financing, with the central bank not having the duty of being an electronic money reserve, so it is not necessary to retain a large number of commercial banks for excess reserves, which not only reduces the cost of bank management and improves the service efficiency, but also expands the business flexibility. Of course, electronic money will also bring a greater uncertainty to the traditional business of commercial banks. For the central bank, e-money will have a certain impact on the money supply and demand, and will increase the endogenous nature of the money supply and demand, thus affecting the implementation effect of monetary policy, and therefore creating greater challenges for the central bank in adopting monetary policy to regulate the domestic economy.
It can be seen that the emergence and development of electronic money has a real impact on all aspects of the social economy. Macroeconomic variables are more or less affected, and the implementation and effectiveness of the central bank’s monetary policy is also more obvious. Therefore, this paper constructs a DSGE model based on electronic money shock to investigate the changes in macroeconomic variables under the impact of electronic money. This will more effectively analyze the impact of electronic money from the perspective of the micro subject. Therefore, the research of this paper has important theoretical value and practical significance for enriching and developing monetary policy theories and improving the effectiveness of monetary policy implementation. For this reason, a macro model was established under the condition of electronic money. The DSGE macro model was adopted and included three main bodies, which were commercial banks, central banks and households. Through the establishment of macro equations to explore the time and degree of changes required for each variable to reach equilibrium under the impact of electronic money, it can more effectively characterize the impact of electronic money on monetary policy through core variables, such as loans, savings and the interest rate, which also reflects, to a certain extent, the real operation of the economy.
The contribution of this paper is mainly in the following aspects: (1) The research perspective is novel. This paper studies the impact of electronic money on monetary policy from the perspective of consumers, commercial banks and central banks, and tries to study the effectiveness of monetary policy from a new perspective; (2) A DSGE model based on the behavior of three monetary subjects is constructed and simulated. This paper attempts to incorporate e-currency shocks into the main body behavior model and construct the DSGE model, estimate its parameters and solve the model, reveal the internal mechanism of the change in the main body behavior of money, focus on the change in the behavior of the central bank and evaluate the effectiveness of monetary policy; (3) The impact effects of electronic money under the two monetary policies are compared. The behavior of the central bank, namely monetary policy, is further divided into quantitative monetary policy and price monetary policy. By constructing their respective models and solving and simulating them, the differences between the two monetary policies and the effectiveness of the policies under the condition of electronic money are analyzed through impulse response results.
The following structure of this paper is arranged as follows: the second part is a literature review, which reviews and evaluates electronic money from three aspects: money supply, money demand and monetary policy effectiveness. The third part is the theoretical model, which aims to build the DSGE model based on the behavior of monetary agents. The fourth part is parameter calibration, the selection of research variables and the calculation of the value of the parameter calibration. The fifth part is the simulation and analysis of the policy effect. Through parameter estimation, model solution and numerical simulation, the internal mechanism and policy effect of the monetary subject behavior change are analyzed. The sixth part comprises conclusions and recommendations.
At present, there are four main aspects of relevant research: the influence of electronic money on money supply, money demand and the effectiveness of monetary policy and the possible impact of a new kind of e-money, digital currency, on monetary policy.
If the issuance of electronic money is directly included in the total amount of money, electronic money will increase the money multiplier, thus increasing money supply [12,13]. Although e-money will influence the total money supply through base money and the money multiplier, the central bank can reduce various impacts of e-money on the money supply through the adjustment of the interest rate level and reserve ratio [14]. Moreover, due to the different influences of e-money issued by different money-issuing subjects on the money supply, it is also difficult for the central bank to supervise them [15]. Empirical research in different countries shows that e-money will influence the stability of the money supply in the short term, whereas, in the long term, it has little effect on the money supply [16,17,18]. Research in China shows that the emergence and development of electronic money not only changes the form of money, but also changes the supply structure of money, and has a significant impact on money liquidity. The substitution of electronic money for paper money in circulation not only enlarges the money supply under the supervision of the central bank, but also enlarges the money supply outside the supervision [19]. Other studies have shown that electronic money in the form of a third-party payment also has a significant impact on the money supply [20].
Mainly, the impact of electronic money on the money demand is mainly reflected in two aspects: one is the speed of money circulation, and the other is currency substitution.
From the perspective of monetary velocity, the influence of electronic money on monetary velocity is complex, and is not only rising or falling, but a combination of various situations [21]. Electronic money can accelerate the velocity of money circulation by influencing the central bank’s monetary control or monetary policy transmission mechanism [10,22,23]. Through an empirical test, it is found that the development of electronic money will lead to the trend of the currency circulation speed falling first and then rising [24,25,26]. Electronic money will increase the substitution between financial assets and accelerate the speed of the currency circulation [27]. However, there are also studies that show that e-money substitution mainly has a substitution acceleration and substitution transformation effect, which leads to a long-term downward trend in the overall speed of China’s currency circulation [9]. Moreover, third-party payments promote the speed of narrow money circulation in the short run, but inhibit it in the long run, and have the opposite effect on the speed of broad money circulation [28].
In terms of currency substitution, if electronic money replaces deposits, the demand for money will moderately decrease, but even if the substitution of electronic money for the central bank currency will benefit enterprises and households, cash and settlement services provided by central bank cannot be replaced by electronic money [14,29]. The Canadian study also found that, although the substitution of electronic money reduces the share of cash payments, the impact of this substitution will not be too strong in the short term [30]. It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time [31]. In recent years, many scholars have studied the determinants of e-money adoption in more micro ways. Social factors, effort expectancy, ease of e-money, facilitation conditions and even the COVID-19 pandemic may affect people’s use of e-money [32,33,34]. However, the research results of China are different from those of foreign scholars. The substitution of electronic money for a transactional demand is not complete. It almost completely replaces the investment demand and produces a higher level of substitution for the preventive demand [35,36,37]. Of course, this may be due to the rapidly increasing development of electronic payment and electronic money in China in recent years.
The research on the influence of electronic money on the effectiveness of monetary policy mainly embodies two aspects: the transmission process of electronic money on monetary policy and the control ability of monetary policy.
From the perspective of the transmission process of monetary policy, starting with the influence of monetary demand, this paper studies the effect of electronic money on the monetary policy and transmission mechanism of the central bank. The research shows that monetary demand not only increases the use of electronic money, but also affects monetary policy [10,38,39]. When studying the influence of e-money on the base currency, if we consider the two cases that the central bank has statutory reserve requirements and no statutory reserve requirements for e-money, the results show that, in both cases, e-money will affect the total amount of the base currency, and will then affect the effect of monetary policy [40]. At the same time, although e-money will affect the balance sheet of the central bank, the central bank can use the existing monetary policy to adjust in order to offset this part of the impact [41]. Moreover, with the development of the Internet and communication technology, the gap between the bank overnight lending rate and the target interest rate has narrowed, and the monetary policy operation is better [42]. Its large-scale circulation reduces the transmission efficiency of monetary policy to different degrees, deepens the endogenous of the money supply and weakens the correlation between the money supply and the ultimate goal of monetary policy, thus reducing the effectiveness of monetary policy [43,44,45]. Some studies show that electronic money has significantly improved the effectiveness of China’s monetary policy, but this improvement has both a lag effect and an immediate effect [46]. Other studies show that the influence of electronic money on monetary policy is uncertain, which enhances the effectiveness of monetary policy from the output channel and weakens the effectiveness of monetary policy from the price channel [47].
Based on the assumption of monetary policy control, electronic money has its own independent system and becomes a private currency, and the central bank has lost the ability to move large transactions, reducing the control ability of monetary policy, where the central bank can only become a symbolic “indicator” [48]. However, there are different views on this. Electronic money can only replace a small share of the basic money issued by the central bank. In real life, people still have a great demand for cash from the central bank. The study of China finds that commercial banks can evade the restraint of the rediscount and deposit reserve by increasing e-money. At the same time, electronic money may make the central bank lack sufficient assets and liabilities to better carry out open market operations, thus greatly affecting the central bank’s ability to control monetary policy [49,50].
As a new form of electronic money, digital currencies, which, in some situations, are called cryptocurrencies, also have some impact on monetary policy. Digital currencies can be issued in two ways: decentralized and centralized [51]. Among them, most privately issued digital currencies, such as Bitcoin, belong to decentralized digital currencies, whereas central bank digital currencies (CBDCs) are centralized currencies issued by central banks, which are essentially different from each other. For the decentralized digital currencies, there is a consensus that they may not play the role of a traditional currency, which satisfies three basics functions of a currency: the means of value scale, circulation and storage [52]. Some specific studies on Bitcoin have suggested that the replacement of Bitcoin for traditional currencies would destroy the existing payment system, thereby adversely affecting the monetary system and the real economy [32]. In addition, decentralized digital currencies will bring risks to the effectiveness of monetary policy, financial stability and economic growth [53,54,55,56]. For the central bank digital currencies, which have a one-to-one correspondence with the legal tender, just like the traditional e-money, most scholars believe that issuing CBDCs will help to improve the effectiveness of monetary policy, and many have reached consensus in this regard [57,58,59,60,61,62]. However, some scholars have also raised concerns about central bank digital currencies, such as narrow banking, raising bank funding costs and reducing investment [63,64,65,66].
In summary, the existing relevant research has made breakthroughs in many aspects and has made many valuable achievements, which is also the important basis of this paper. Due to the emerging research field of electronic money and the rapid development of Internet finance, financial technology and electronic money in China in recent years, there has been a lot of relevant research on China. However, there are some shortages in existing research: first, regarding the research content, the existing research mainly discusses the electronic money impact on the money supply and money demand, starting from the various influence factors, such as the monetary base, money multiplier and currency substitution, putting forward relevant suggestions. In this paper, monetary policy and the macro system is included, and the influence of the economic operation mechanism is stated in detail, which may fill in the gaps in the knowledge of this stream of references in China. Second, regarding the research methods, the existing research focuses mostly on the electronic money factors affecting the money supply, whether they have a significant correlation and how to develop a more inclusive monetary policy, putting forward relevant suggestions; however, few articles go through the DSGE model to study the electronic money. This paper uses the DSGE model to illustrate how the economic subject behavior influences the effect of monetary policy. Third, regarding the research framework, most of the literature studied the influence of electronic money on monetary policy through theoretical analysis, and put forward relevant policy suggestions. However, there is no further analysis of the type of monetary policy through a clear decision formula (such as the Taylor rule), and few literatures put forward relevant suggestions in a targeted way. This paper tries to give more reasonable suggestions based on the model’s numerical results. In short, the research on the impact of electronic money on monetary policy is not systematic and in-depth enough, which creates a certain space for the research of this paper.
Due to space limitations, this article does not discuss the impact of digital currencies on monetary policy in depth. Besides, some parameter calibrations in this article refer to the existing literature without further empirical research. This may be a limitation of this article.
As the mainstream economic analysis model in the fields of macro-economy, monetary policy and fiscal policy, the DSGE model starts from the perspective of the aggregate demand and supply of New Keynesianism and adopts the combination of theoretical modeling and stochastic simulation in order to effectively observe the dynamic change relationship among economic variables and accurately measure the expected trend. Based on the micro theory, the model considers the optimal behavior of each economic entity, including the representative maximization behavior of the household utility, the maximization behavior of the manufacturer profit and the decision-making behavior of the central bank. Each economic entity realizes the optimal decision under different constraints. The model has the advantages of an explicit modeling framework and is closely combined with a macro and micro analysis and with a long-term and short-term analysis organically, which is more comprehensive than the traditional method [67]. Many central banks, financial departments, the International Monetary Fund and other institutions are also developing DSGE models with different complexities, which are widely used in financial market practices, such as central banks, commercial banks, the interest rate and foreign exchange rates [68,69,70,71,72,73,74]. The DSGE models have developed rapidly since the global financial crisis in 2008, and one survey showed that 84 different DSGE models exist that have been developed by 58 institutions [1]. Recently, the DSGE model was widely used in the field of monetary policy [75,76,77,78,79]. Therefore, the DSGE model has become the mainstream research method in the field of economic research and policy analysis, and there will be a greater need for future DSGE policy models to adopt more recent findings in empirical literature.
This paper aims to study the impact effect of e-money on monetary policy and, specifically, to explore the impact of the behavior changes in main monetary subjects, such as households, commercial banks and the central bank, on monetary policy under the impact of e-money. This paper needed to objectively consider the close combination of the theoretical model and empirical simulation, the dynamic changes in macro and micro monetary entities and the effect of long-term and short-term monetary policy, and the demand for research methods is naturally consistent with the advantages of the DSGE model. Therefore, it is more appropriate to choose the DSGE model. Although SVAR, stochastic simulation and other traditional methods can also be chosen to study the problem mentioned in this paper, they have limitations; for example, the SVAR model can also identify many exogenous random shocks, but cannot carry out dynamic analysis and explain the problem of the intertemporal optimal decision. It also cannot achieve the general equilibrium of products, labor, capital and other markets. Therefore, the DSGE model selected in this paper should be the best.
In order to explore the impact of e-money on monetary policy, a universal DSGE model based on e-money was constructed, which can represent most countries. The modeling of this paper was divided into two parts: the first part was to analyze the impact of e-money on the behavior of the subject from the three perspectives of the residents, commercial banks and the central bank, forming a relatively systematic theoretical system. Then, the impact of e-money on consumption was reflected in the mathematical model of each subject, and the DSGE basic model, including the impact of e-money, was built and solved. The second was to include the restraining impact caused by the risk of e-money into the basic model, forming an extended model that included the promotion impact and the restraining impact of e-money.
The DSGE model based on the new Keynes framework can effectively establish monetary policy rules and depict the optimal behavior of households, commercial banks and central banks, and reflect the operation dynamics of the real macroeconomic system. The DSGE model constructed in this paper includes three economic entities, namely, households, commercial banks and central banks. The behavioral relationship among economic entities is shown in Figure 1. The core of the DSGE model established in this paper is from the perspective of money, and relevant variables (such as loans and savings) are directly related to money, which facilitates an in-depth discussion of the impact of electronic money on monetary policy.
This assumption is made according to Kiyotaki and Moore [80], who raised the issue of heterogeneous agents for the first time, which is an extensive application in the analyses in a DSGE model [81,82,83,84]. This assumption is in line with reality because the saving rate differs from each family, and can bring better explanatory power to the model.
This assumption is made referring to Liu Zhilin’s model set up in 2016 [85]. The first half of the assumption can help us to determine the interest rate level, and the second half can help us derive the asset allocation of the two types of households.
This assumption is made for the central bank to regulate and control the economy, which is in line with reality.
According to Section 3.1.1, patient households have a higher tendency to save, where saving brings a higher utility than consumption, and impatient households have a higher tendency to consume, where consumption brings a higher utility than savings. Here, we introduce electronic money to analyze the utility of two types of households. It is important to note that, since the global financial crisis in 2008, most western countries have implemented unconventional monetary policies (a negative or zero interest rate and quantitative easing), which have a significant impact on the savings utility of patient households, and even produce negative effects. Although there were many financial instruments to choose from, patient families can only choose bank deposits with a relatively low risk under the circumstances of uncertain economic growth, fierce financial market volatility and a high risk of financial market instruments. The implementation of unconventional monetary policy was not a normal choice, but a choice made in a special period (such as a financial crisis). We only considered the general situation when we analyzed the impact of electronic money on monetary policy. Since the later simulation was based on China’s data, it is more realistic to focus on bank deposits, which can also represent the situation of most countries.
Patient families try to maximize their utility function: m a x E 0 ∑ t = 0 ∞ β s t ω t δ t 1 l o g C t 1 + 1 − ω t δ t 1 B t − B t − 1In the formula, 0 < β s t < 1 is an intertemporal discount factor for patient families; C t 1 , B t represents patient household consumption and savings in the t period, respectively; ω t δ t 1 is the proportion of household consumption in the utility function; ω t stands for the promotion coefficient of e-money to consumption. The existence of e-money greatly reduces transaction costs and improves transaction convenience, which will promote household consumption to a certain extent. Therefore, we will also express ω t as the change in consumer preferences of e-money, and its impact will increase with the increase in e-money transaction penetration. Therefore, we assume that ω t = A ω t − 1 + u t and that u t follows the autoregressive process. The equation represents the equation of model shock. Generally speaking, the impact from the macro level had certain inertia. Therefore, it was generally assumed that the model shock in the DSGE model was first-order autoregressive, and that the residual term was assumed to follow the autoregressive equation. In this equation, we studied the impact of the rapid development of electronic money on the residents’ decision-making equation, which further affected the behavior equation of commercial banks and central banks. Finally, according to the adjustment of various variables, the economy formed by the three main bodies reached a new equilibrium. Equation (1) represents the utility function of the patient family. In our model, compared with the non-patient family, the patient family was more likely to choose savings in order to meet the delayed consumption. Therefore, the utility of the patient family came from two parts: one was to improve the current consumption, and the other was to meet the savings for future consumption. In fact, for a patient family, the current savings increment, rather than the absolute amount of current savings, was the variable that best reflected the current utility. Therefore, this model adopted the index of the savings increment. The logarithm of consumption was used because it was easy to find the first-order optimal solution by processing the data without changing the increase and decrease in the function. Currently, most of the literature dealt with the variables by means of logarithm. We have added relevant explanations in the revised version.
Its budget constraints are: C t 1 + B t = r b , t B t − 1 / ( 1 + π t )In the formula, r b , t represents the deposit rate of commercial banks in the t period, and π t represents the rate of inflation in the t period. Equation (2) represents the budget constraint for those patient families. This model assumed that the source of funds in the current period was the amount of savings in the previous period multiplied by the rate of return on investment and then divided by the level of inflation, which was the sum of consumption and savings in the current period. In this equation, the denominator reflected the level of price. If inflation occurred, the denominator value was greater than 1, which can be used to eliminate the impact of inflation on the equation. It can be concluded that the first-order conditions for the optimal economic behavior of the patient family sector are:
