Financial Innovation and the Transactions Demand for Cash / Fernando E. Alvarez, Francesco Lippi.

Format:

Book

Author/Creator:

Alvarez, Fernando E.

Contributor:

National Bureau of Economic Research.

Lippi, Francesco.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13416.

NBER working paper series no. w13416

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

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.

Notes:

Print version record

September 2007.