U.S. Consumer Demand for Cash in the Era of Low Interest Rates and Electronic Payments
40 Pages Posted: 5 Apr 2014
Date Written: March 13, 2014
U.S. consumers’ demand for cash is estimated with new panel micro data for 2008-2010 using econometric methodology similar to Mulligan and Sala-i-Martin (2000), Attanasio, Guiso, and Jappelli (2002), and Lippi and Secchi (2009). We extend the Baumol-Tobin model to allow for credit card payments and revolving debt, as in Sastry (1970). With interest rates near zero, cash demand by consumers using credit cards for convenience (without revolving debt) has the same small negative interest elasticity as estimated in earlier periods and with broader money measures. However, cash demand by consumers using credit cards to borrow (with revolving debt) is interest inelastic. These findings may have aggregate implications for the welfare cost of inflation because the non-trivial share of consumers who revolve credit card debt are less likely to switch from cash to credit. In the 21st century, consumers get cash from bank and non-bank sources with heterogeneous transactions costs, so withdrawal location is essential to identify cash demand properly.
Keywords: Cash demand, Baumol-Tobin model, Survey of Consumer Payment Choice, SCPC
JEL Classification: E41, E42
Suggested Citation: Suggested Citation