Likewise, Malaysia’s currency in circulation (CIC) over GDP of 6.1% is much higher than 3.8% on average in these countries. Over the past three years (2010 – 2012), cheque volume has declined only marginally at an average rate of 0.2% annually and the CIC over GDP remained at 6%. Malaysia has a banking population of 92% of which about 70% are internet banking subscribers. Moreover, the household broadband penetration rate in Malaysia has increased significantly from 32% in 2009 when we introduced the electronic processing of cheques, to 67% as at end-Sept 2013. With the necessary infrastructure in place, it is timely that all Malaysians migrate to electronic payments in our quest to become a high income, high value-added economy by 2020. To nudge the systematic migration to electronic payments, Bank Negara Malaysia has set targets in its Financial Sector Blueprint to reduce the number of cheques processed per annum by half from 204 million in 2012 to 100 million by 2020. At the same time, there are also targets to increase the number of Point-of-Sale terminals from 9 in 2012 to 25 unit per 1,000 inhabitants and to increase electronic payment transactions per capita from 56 in 2012 to 200 by 2020. Only by migrating from cheques and cash to electronic payments, can the country anticipate to achieve further cost savings and efficiency gains. Cost of cheques Although significant improvement has been made in the cheque processing infrastructure, cheque remains an expensive payment instrument to process at about RM3 per cheque.

Looking at developing countries makes this point even stronger, since it can also apply to inventory management and other forms of common productivity shocks since the asynchronicity is much more significant. 2  BIS Review 74/2008  However, reforms regarding monetary policy have lagged noticeably in their adoption among developing economies. Central bank independence, inflation targeting and other related policy reforms have only materialized in developing economies beginning in the mid-90s which coincides with the fall in volatility in this group of countries. While structural changes, such as the increased openness, may have indeed helped economies become more stable, these changes must also include those related to monetary policy because the Great Moderation coincides with inflation control, suggesting that improved monetary policy has indeed played a major role. So, the relevant question is exactly how does monetary policy reduce the volatility of both output and inflation. We know that there is a tradeoff between output volatility and inflation variability, and monetary policy attempts to manage this tradeoff optimally. Policymakers have to decide how to reduce inflation to reach their goal. If they react forcefully to any inflation deviation, the outcome will be low inflation volatility, but large output volatility. Thus, in the long run, there is a tradeoff between inflation volatility and output volatility, although inflation has no effects on the full employment level of output. It is also possible to practice inefficient monetary policy, one which lags behind the output/inflation volatility frontier, making both of these inefficiently large.