Cash burns: An inventory model with a cash-credit choice / Fernando Alvarez, Francesco Lippi.

Format:

Book

Author/Creator:

Alvarez, Fernando.

Contributor:

National Bureau of Economic Research.

Lippi, Francesco.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21110.

NBER working paper series no. w21110

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Cash burns

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

We present a model that characterizes the relationship between optimal dynamic cash management and the choice of the means of payment. The novel feature of the model is the sequential nature of the payments choice: in each instant the agent can choose to pay with either cash or credit. This framework predicts that the current level of the stock of cash determines whether the agent uses cash or credit. Cash is used whenever the agent has enough of it, credit is used when cash holdings are low, a pattern recently documented by households data from several countries. The average level of cash and the average share of expenditures paid in cash depend on the opportunity cost of cash relative to the cost of credit. The model produces a rich set of over-identifying restrictions for consumers' cash-management and payment choices which can be tested using recent households survey and diary data.

Notes:

Print version record

April 2015.