Revisiting the Empirical Evidence on Firms' Money Demand
37 Pages Posted: 14 Jul 2006
Date Written: May 2006
In this paper we estimate the demand for liquidity by US non financial firms using data from COMPUSTAT database. In contrast to the previous literature, we consider firm-specific effects, such as cost-of-capital and wages. From the balanced and unbalanced panel estimations we infer that there are economies of scale in money demand by US business firms, because estimated sales elasticities are smaller than unity. In particular, they are lower than in previous empirical studies, suggesting that economies of scale in the demand for money are even bigger than formerly thought. In addition, it emerges that labor is not a substitute for money.
Keywords: Panel Data, Liquidity, Demand for Money, COMPUSTAT
JEL Classification: E41, L60, C23
Suggested Citation: Suggested Citation