By Francesco Carli and Burak Uras
http://d.repec.org/n?u=RePEc:zbw:bofrdp:152022&r=dge
We develop a micro-founded monetary model to inquire the role of a privately provided e-money instrument for household consumption smoothing and welfare. Different from fiat money, e-money users pay electronic transaction fees, but in turn e-money reduces spatial separation frictions and enables risk-sharing. We characterize the conditions that promotes e-money to be Pareto improving and the conditions when e-money reduces its users’ welfare – despite for the consumption-smoothing it induces. We calibrate our model for the context of M-Pesa in Kenya and conduct a quantitative analysis. Since our quantitative analysis reveals a limited role for privately provided e-money, we recommend the optimality of e-money regulation.
This paper is a fascinating application of money search theory to the emergencies of privately issued mobile money. There are clear advantages from providing a widely adopted transaction system, but monopoly power comes with it, hence the need to regulate. The motivation for regulation here is thus different from regular banking regulation, which is more concerned about systemic financial health.
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