DP2696 | Monetary Policy in a Cashless Society

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In this Paper we analyse how monetary policies will be affected in a cashless society. Our main conclusions are that the central bank will lose its traditional instruments of monetary policy. Open market operations and advances to banks will become ineffective as instruments to control the interest rate and the money stock. We argue that this leads to two possible avenues for the future role of the central bank. In the first one the central bank becomes dependent on the treasury, both as a means to obtain revenues and as a way to maintain some effectiveness for its traditional instruments on monetary policies. Another avenue consists of strengthening the supervisory role of the monetary authority. This strengthening would include the quality control of the loan portfolios of the money issuing institutions, as a way to ensure market stability and to avoid bank runs. Simultaneously, supervision would allow the central bank to impose reserve requirements and to influence the money supply.