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Cash burns: An inventory model with a cash-credit choice

Fernando Alvarez and Francesco Lippi

Journal of Monetary Economics, 2017, vol. 90, issue C, 99-112

Abstract: A dynamic cash-management model is analysed 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 households’ payment choices. The optimality of such a 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. The model is used to assess the household’s welfare cost of phasing out cash.

Keywords: Inventory models; Cash-credit choice; Means of payment; Money demand; Phasing out cash (search for similar items in EconPapers)
Date: 2017
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Working Paper: Cash burns - An inventory model with a cash-credit choice (2015) Downloads
Working Paper: Cash burns: An inventory model with a cash-credit choice (2015) Downloads
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