Alternative Payment Systems implication for Currency Demand and Monetary Policy in Developing Economy: A Case Study of Nigeria

This paper investigates the implication of the alternative payment systems on currency demand and monetary policy using monthly data between 2008 and 2010. Vector Error Correction Model (VECM) was used due to endogenous assumption that predicated our model and the co-integrating behavour of variables employed. Previous theoretical and empirical studies on this issue are scarce for developing economies and to best of our knowledge none exists for Nigeria. The empirical results from Impulse-Response reveal that internet payment and mobile money substitute currency while credit card (ATM) and Point of Sale (POS) compliment it. Similarly, Apart from debit card (ATM) and internet payment (WEB) all other payment channels respond negatively to innovation in interest rate throughout the periods including currency. This finding may have serious implication for the conduct of monetary policy especially in developing countries as it alternative payment systems seem to dampen the effectiveness of monetary policy.