Working Papers

April 1996, No. 96-3

Stored Value Cards: Costly Private Substitutes for Government Currency

Jeffrey M. Lacker

A model in which both currency and stored value cards are used to make payments is presented. I compare steady-state equilibria with and without stored value 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, the alternative means of payment may have larger real resource costs than the currency it replaces. Stored value results in either a net increase or a net decrease in economic welfare depending upon whether average costs are below or above a certain cut-off. Quantitative restrictions on stored value can be socially beneficial because they reduce the amount of resources absorbed by the most costly stored value applications.

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