We construct a simple general equilibrium model to demonstrate how eliminating cash can lead to a misallocation of resources in a naturally segmented economy with observed (official) and non-observed (informal) sectors. The source of inefficiency mirrors the standard arguments explaining why money is essential: a promise backed by a good produced in one sector can not be used in another and so absence of a reliable fiat money reduces the gains from trade. We also point to several additional unintended consequences of cash elimination.
SOURCE: Cohen, N. Rubinchik, A. Shami, L. “Towards a cashless economy: Economic and socio-political implications.” European Journal of Political Economy, 01 October 2019.
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