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Demand for Cash with Intra-Period Endogenous Consumption

Avner Bar-ilan and Nancy Marion ()

No WP2010/4, Working Papers from University of Haifa, Department of Economics

Abstract: We study the demand for money when agents can optimally choose mean rates of consumption and cash holdings over a period. Consistent with empirical evidence, we find that agents do not smooth intra-period consumption. Instead, their rate of consumption is positively correlated with their cash position. This positive correlation depends on the volatility of the consumption process. When volatility is very low or very high, agents choose to consume at a relatively high rate immediately after a cash withdrawal, drawing down quite rapidly their cash balances. Later in the period, their rate of consumption and cash depletion is more restrained. This sizeable deviation from consumption smoothing is much less pronounced when volatility is moderate.

Keywords: money demand; consumption smoothing; drift control (search for similar items in EconPapers)
JEL-codes: E41 (search for similar items in EconPapers)
Pages: 26
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Journal Article: Demand for cash with intra-period endogenous consumption (2013) Downloads
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