This is what's in your wallet... and here's how you use it

Tamás Briglevics and Scott Schuh

No 14-5, Working Papers from Federal Reserve Bank of Boston

Abstract: Models of money demand, in the Baumol (1952)-Tobin (1956) tradition, describe optimal cash management policy in terms of when and how much cash to withdraw, an (s, S) policy. However, today, a vast array of instruments can be used to make payments, opening additional ways to control cash holdings. This paper utilizes data from the 2012 Diary of Consumer Payment Choice to simultaneously analyze payment instrument choice and withdrawals. We use the insights in Rust (1987) to extend existing models of payment instrument choice into a dynamic setting to study cash management. Our estimates show that withdrawals are rather costly relative to the benefits of having cash. It takes 3-8 transactions to recoup the fixed withdrawal costs. The reason is that the shadow value of cash decreases substantially with the number of available payment instruments and, correspondingly, individuals are less likely to make withdrawals.

Keywords: money demand; inventory management; payment instrument choice; payment cards; Diary of Consumer Payment Choice (search for similar items in EconPapers)
JEL-codes: E41 E42 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-06-01
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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