Cash Burns: An Inventory Model with a Cash-Credit Choice

47 Pages Posted: 7 Apr 2017

See all articles by Fernando Alvarez

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Francesco Lippi

Università degli Studi di Sassari; Einaudi Institute for Economics and Finance (EIEF)

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Date Written: April 3, 2017

Abstract

We present a dynamic cash-management model where agents choose whether to pay with cash or credit at every point in time. In the model credit usage depends on the current stock of cash, a novel result that matches recent micro evidence on household’s payment choices. The optimality of such decision rule is novel and cannot be obtained by models where cash-credit decisions are made at the “beginning” of each period. We discuss how to use the model to account for cross country-evidence on the intensity of credit usage and for several statistics on the size and frequency of cash withdrawals. We use the model to assess the household’s welfare cost of phasing out cash.

JEL Classification: E41, G2

Suggested Citation

Alvarez, Fernando and Lippi, Francesco, Cash Burns: An Inventory Model with a Cash-Credit Choice (April 3, 2017). Becker Friedman Institute for Research in Economics Working Paper No. 2017-06, Available at SSRN: https://ssrn.com/abstract=2948060 or http://dx.doi.org/10.2139/ssrn.2948060

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Francesco Lippi

Università degli Studi di Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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