Financial Innovation and the Transactions Demand for Cash
49 Pages Posted: 30 May 2008
There are 3 versions of this paper
Financial Innovation and the Transactions Demand for Cash
Financial Innovation and the Transactions Demand for Cash
Date Written: September 2007
Abstract
We extend the Baumol-Tobin cash inventory model to a dynamic environment, which allows for the possibility of withdrawing cash at random times at a low cost. This modification captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We characterize the solution of the model and show that qualitatively it is able to reproduce such patterns. Estimating the structural parameters we show that the model accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.
Keywords: inventory models, money demand, technological progress
JEL Classification: E5
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Orazio Attanasio, Luigi Guiso, ...
-
On Transactions and Precautionary Demand for Money
By Jacob A. Frenkel and Boyan Jovanovic
-
Financial Innovation and the Transactions Demand for Cash
By Fernando Alvarez and Francesco Lippi
-
Financial Innovation and the Transactions Demand for Cash
By Fernando Alvarez and Francesco Lippi
-
Technological Change and the Demand for Currency: An Analysis With Household Data
By Francesco Lippi and Alessandro Secchi
-
Technological Change and the Demand for Currency: An Analysis with Household Data
By Francesco Lippi and Alessandro Secchi
-
Is the Baumol's 'Square Root Law' Still Relevant? Evidence from Micro-Level Data
By David Bounie and Abel Francois
-
Scale Economies and Heterogeneity in Business Money Demand: The Italian Experience
By Luigi Grossi, Giancarlo Ianulardo, ...