Stored Value Cards: Costly Private Substitutes for Government Currency

Abstract

A model of currency and stored value cards as media of exchange reveals how the economy might fare with and without such cards. Stored value cards are beneficial because they help alleviate the deadweight loss due to inflation. When the nominal interest rate is greater than the government's resource cost of providing currency, an alternative means of payment may have larger real resource costs than the currency it replaces. Stored value either increases or decreases net economic welfare depending upon whether average costs are below or above a certain cutoff. Quantitative restrictions on stored value could be socially beneficial if they reduce the amount of scarce resources absorbed by the most costly stored value uses.