Financial Innovation and the Transactions Demand for Cash

Fernando Alvarez and Francesco Lippi
Additional contact information
Fernando Alvarez: University of Chicago and NBER

No 807, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We extend the Baumol-Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We characterize the solution of the model and show that qualitatively it is able to reproduce the empirical patterns. Estimating the structural parameters we show that the model quantitatively accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.

Pages: 47 pages
Date: 2007, Revised 2007-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.eief.it/files/2012/09/wp-07-financial-i ... -demand-for-cash.pdf (application/pdf)

Related works:
Journal Article: Financial Innovation and the Transactions Demand for Cash (2009)
Working Paper: Financial Innovation and the Transactions Demand for Cash (2007)
Working Paper: Financial Innovation and the Transactions Demand for Cash (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:0807

Access Statistics for this paper

More papers in EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF) Contact information at EDIRC.
Bibliographic data for series maintained by Facundo Piguillem ().