Technological Change and the Demand for Currency: An Analysis With Household Data

Abstract

Advances in the transaction technology allow agents to economize on the cost of cash management. We argue that accounting for the impact of new transaction technologies on currency holding behaviour is important to obtain theoretically consistent estimates of the demand for money. We modify a standard inventory model to study the effect of the withdrawal technology on the demand for currency. An empirical specification for the households demand schedule is suggested in which both the level of currency holdings and the interest rate elasticity of the demand depend on the withdrawal technology available to agents (e.g. ATM card ownership or a high/low density of bank branches, ATMs). The theoretical implications are tested using a unique panel of Italian household data (on currency holdings, deposit interest rates, consumption, development of banking services, etc.) for the 1989-2004 period.

Keywords: Inventory models, money demand, technological change

JEL Classification: E5