This dissertation starts by examining the evolution of the Canadian payments system from a historical perspective by reviewing the institutional evolution, as well as the development and adoption of some of the newest payment instruments. Two major trends in recent Canadian payment history are revealed, i.e., cash payments are being replaced by non-cash payments and paper-based payment instruments are being replaced by electronic payment instruments.; Next, we adopt a model proposed by Snellman et al. (2000) to conduct a Canadian study of the retail cash payment flows. The estimated results imply that the share of cash, as well as cheques, in overall retail payments in Canada has declined quite considerably. We then investigate the cash substitution process, as well as the electronification of payments in Canada using S-shaped growth curve models. Our results indicate that although the card payments will continue to further substitute for cash, cash will still remain the preferred medium of retail payments in Canada. However, approximately 80% of all payments are forecasted to be electronic in just 20 years.; This dissertation then extends the existing literature on the long-run money demand relationship in Canada by employing information on the payment technology development as an instrument variable to account for financial innovations that might have caused structural shifts in the money demand equation. The econometric methodology employed is cointegration and error-correction modelling. It is found that our measure of financial innovations removes most of the structural breaks in the money demand equation over the sample period. A unique and significant long-run money demand relationship is detected. The short-run dynamic specifications of the VECM system imply the weak exogeneity of output and interest rates.
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