Retail payment technology and money demand: evidence from China

Chun-Yu Ho, Rongzi Shan and Li Xu

Abstract

This paper examines the impact of retail payment technology on money demand. Our study provides three main findings. First, using a unique quarterly data set from China spanning the period 1999 Q1 to 2020 Q4, we analyze the ratio of payment through point-of-sale machines to retail sales to measure payment card penetration in retail transactions and show that payment card penetration increased from 0.02 to 3.16 over the sample period. Second, by estimating a semi-logarithmic money demand function, we show that higher payment card penetration reduces money demand, with an elasticity estimated at -0.16. Third, we assess the welfare cost of inflation by employing a consumer surplus approach, showing that this cost would have more than doubled in the year 2020 had payment card penetration remained at its 1999 level. Finally, our results are shown to be robust across alternative money demand functions.