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Financial innovation and the transactions demand for cash

Alvarez, Fernando and Lippi, Francesco (2009) Financial innovation and the transactions demand for cash. Econometrica, Vol. 77 (2), p. 363-402. eISSN 1468-0262. Article.

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DOI: 10.3982/ECTA7451

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, which qualitatively reproduces several empirical patterns. We estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns. 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, and the benefit of ATM ownership.

Item Type:Article
ID Code:2780
Status:Published
Refereed:Yes
Uncontrolled Keywords:Money demand, technological progress, inventory models
Subjects:Area 13 - Scienze economiche e statistiche > SECS-P/01 Economia politica
Divisions:001 Università di Sassari > 01 Dipartimenti > Economia, impresa, regolamentazione
Publisher:Blackwell / Wiley
eISSN:1468-0262
Copyright Holders:© 2009 The Econometric Society
Deposited On:20 Aug 2009 12:39

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