Scale Economies and Heterogeneity in Business Money Demand: The Italian Experience

Piero Ganugi, Luigi Grossi and Giancarlo Ianulardo
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Piero Ganugi: Catholic University of the Sacred Heart
Giancarlo Ianulardo: University of Bath

No 17/09, Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: This paper investigates the demand for money by firms and the existence of economies of scales in order to evaluate the efficiency in the cash management of the Italian manufacturing industry. We estimate a money demand for cash elaborated by Fujiki and Mulligan (1996). Estimates differ from the previous literature firstly, because we use a choice dynamic model to overcome endogeneity problems in cash holdings; secondly, because we use an iterative procedure based on backward exclusion of firms from model estimation with which we point out the high heterogeneity of Italian companies in money demand. Our estimates show that the Italian Manufacturing industry, considered as whole, does not enjoy scale economies in money demand. Our iterative procedure points out that the cause of this result is to be ascribed to small firms which are characterized by thin cash money holdings and a consequently very modest opportunity cost. Once small size firms are removed from our data set our estimates reveal that money demand of medium and large size firms is different for high scale economies. This result, together with the fact that small firms’ cash balances are thin, implies the efficiency of Italian manufacturing industry.

Date: 2009
New Economics Papers: this item is included in nep-mon
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Journal Article: SCALE ECONOMIES AND HETEROGENEITY IN BUSINESS MONEY DEMAND: THE ITALIAN EXPERIENCE (2015)
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