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Financial Innovations and Monetary Policy - Term Paper Example

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What started as an archaic barter economy where cumbersomeness in trading and inefficiency due to the need of double coincidence has undergone…
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Financial Innovations and Monetary Policy
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Download file to see previous pages on of debit and credit card into the economy was seen as a major step as this was believed to significantly curb the risks associated with carrying cash and eliminate the losses incurred by investors due to destruction of money as a result of losing cash or fire epidemic. Use of cash is also dispirited due to the continual problem of counterfeiting and the often contested argument that it makes it easy for criminals such as prostitutes and drug dealers to conduct business (Mishkin, 2009; Goodhart, 2000). While the prognoses for the eradication of cash have demonstrated to be quite challenging, the boom in internet shopping has sent a clear signal to futurists that the cashless society is almost becoming an overpowering reality which will present its benefits and drawbacks to consumers and banks, particularly when the whole concept of monetary policies is taken into consideration (Goodhart, 2000). Many developed economies are presently striving towards an economy where cash will be minimal and e-money, which in its broadest sense is electronic money often exchanged electronically through technical devices including mobile handsets and computers, is also significantly reduced (Goodhart, 2000).
A cashless society implies that coins and currency will be absent but that does not imply a backward development towards barter system, but rather a development towards a society with widespread use of EFTS (Electronic Funds Transfer System). In the US, for instance, only 7% of transactions are in cash as over 90% of transactions are sealed via e-money (Palley, 2011). Apparently, these transactions are low-value transactions involving only small amounts of money. People have accepted EFTS, and it is not surprising that organizations have been forced to use EFTS to remain competitive. However, as the move towards a cashless economy proceeds incrementally, it raises significant issues with regard to monetary policy, the consumer, and payment system threats.
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