The Political Economy of Institutional Change in the Payment System and Monetary Policy

36 Pages Posted: 14 Nov 2006

See all articles by Stefan W. Schmitz

Stefan W. Schmitz

Oesterreichische Nationalbank (OeNB); Vienna Circle Society

Date Written: January 10, 2006


Innovations in payment systems are often framed as technological innovations that are exogenous to the institutions and dynamics of the payment system. This paper suggests that the main drivers of institutional change in the payment system are politico-economic factors and the demand of commercial banks and final customers rather than technological innovations. The development and adoption of specific payments technologies are endogenous to the politico-economic tensions that drive institutional change in the payments system. Based on this politico-economic conceptual framework, I investigate the impact of recent innovations in payment systems on monetary policy. The main results of the paper are the following: first, central banks will retain their monopoly to issue the generally accepted medium of exchange with its incidental functions as the uniform unit of account and the medium of final settlement at zero marginal cost. Monetary policy will remain effective, in principle. Second, the question whether central banks will survive innovations is one of political economy rather than one of technology diffusion, that is, it is one of the ability to present their case to the respective legislature relative to the respective capabilities of banks and their final customers.

Keywords: Government and the Monetary System, Monetary Policy, Payment Systems, Political Economy, Institutional Economics

JEL Classification: B52, E42

Suggested Citation

Schmitz, Stefan W., The Political Economy of Institutional Change in the Payment System and Monetary Policy (January 10, 2006). Available at SSRN: or

Stefan W. Schmitz (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner Platz 3
POB 61
Vienna 1011

Vienna Circle Society ( email )

Spitalgasse 2-4, Court 1
Vienna, 1090

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