Money Demand: Cash-in-Advance Meets Shopping Time

Central European University Working Paper No. 3/2002

38 Pages Posted: 14 May 2002

See all articles by Max Gillman

Max Gillman

Central European University (CEU) - Department of Economics

Glenn Otto

UNSW Australia Business School, School of Economics

Date Written: 2002

Abstract

The paper presents a theory of the demand for money that combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation - that reduces the cost of credit - induces agents to substitute away from money towards exchange credit. This results in an interest elasticity of money that rises with the inflation rate rather than the constant elasticity found in standard shopping time specifications. A number of the key predictions of the banking time theory are tested using quarterly data for the US and Australia. We find empirical support for some aspects of the model.

Keywords: money demand, cointegration, financial technology, banking time

JEL Classification: O42, E13, E41, E51

Suggested Citation

Gillman, Max and Otto, Glenn, Money Demand: Cash-in-Advance Meets Shopping Time (2002). Central European University Working Paper No. 3/2002. Available at SSRN: https://ssrn.com/abstract=309943 or http://dx.doi.org/10.2139/ssrn.309943

Max Gillman (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3227 (Phone)
+36 1 327 3232 (Fax)

Glenn Otto

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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