When Mobile Money Changes the Aggregates
Maru is a small open economy with a domestic currency, the maru, and widespread unofficial use of U.S. dollars. Mobile-money wallets now handle 62% of retail payments. Wallet balances are fully backed by deposits at commercial banks, and the central bank reports the following annual averages: currency in circulation 180 billion maru; demand deposits 420 billion; savings deposits 900 billion; time deposits 650 billion; money-market fund shares 300 billion; wallet balances 250 billion; and U.S. dollar cash held by residents equivalent to 400 billion maru. The government finances 18% of spending with currency seigniorage. A reform proposal would make the U.S. dollar sole legal tender and require wallets to hold dollar reserves. The finance ministry asks whether the reform would improve price stability and what would happen to the central bank's balance sheet and monetary control.
1. Using conventional M1 and M2 definitions, calculate both aggregates and explain where mobile-money balances belong. Does the answer change if wallets are fully backed by bank deposits?
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Start from the instrument's function, not its label.
- If wallet balances are transferable and accepted for payments, they are money. If they are merely prepaid claims redeemable only with the provider, they are near-money.
- The backing deposits create a double-counting problem. Suppose the 420 billion of demand deposits already includes 250 billion held by wallet providers. Then household-accessible demand deposits are 170 billion. Counting both the 250 billion backing deposits and the 250 billion wallet balances would count the same purchasing power twice.
Under that assumption:
- M1 = 180 + 170 + 250 = 600 billion maru.
- M2 = M1 + 900 + 650 + 300 = 2,450 billion maru.
If the 420 billion excludes wallet providers' deposits, M1 = 180 + 420 + 250 = 850 billion and M2 = 2,700 billion. The correct treatment hinges on whether the backing deposits are already inside the reported deposit aggregate. A central bank should publish a bridge table so the public can see the consolidation.
2. Estimate the seigniorage loss from dollarization. Is seigniorage a free source of government revenue?
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A simple estimate of seigniorage is inflation times currency outstanding: 0.06 × 180 = 10.8 billion maru per year. That is a flow, not a permanent stock gain. If dollarization retires most maru currency, the government loses most of this flow and the central bank loses the ability to earn interest on reserve assets backing the currency. The one-time balance-sheet effect depends on how the central bank redeems its liabilities and whether it holds dollar reserves.
Seigniorage is not free. It is an inflation tax paid by money holders. The 18% budget share means the government has become dependent on that tax. Dollarization may improve price stability by removing the domestic inflation tax, but it also transfers seigniorage to the U.S. and forces the finance ministry to replace the revenue with taxes or spending cuts. The reform should be judged on that fiscal adjustment, not just on the inflation rate.
3. Does Gresham's law predict that dollarization improves or worsens monetary stability? Explain using legal tender and exchange-rate rules.
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Gresham's law applies when two monies are legal tender at a fixed legal exchange rate and one is overvalued by law. People spend the overvalued, bad money and hoard the undervalued, good money. Here the maru is the inflationary money; residents already use dollars as a store of value. Making the dollar sole legal tender does not demonstrate Gresham's law; it ends the parallel standard.
Price stability may improve because the domestic inflation tax is removed, but the country imports U.S. monetary policy and loses a domestic lender of last resort. The central bank's balance sheet shrinks as maru liabilities are retired; its remaining assets may be dollar reserves. Monetary control shifts from domestic open market operations to reserve requirements on dollar-intermediated wallets and to fiscal policy. The reform is not a free lunch: it trades inflation risk for loss of seigniorage, policy autonomy, and crisis-fighting capacity.