Working Paper: CEPR ID: DP5010
Authors: Joseph Zeira
Abstract: Consumers make transactions of different sizes over time. This paper shows that this fact, together with transaction costs of various assets, can help in developing a theory of liquidity. Assets with different cost structures are used to purchase different sizes of transactions. This can explain the demand for money itself, the precautionary demand for money, and the demand for cash and demand deposits. Thus consumers use cash for small transactions, demand deposits for larger transactions, and use savings for the largest transactions. Finally, the paper shows that modeling banks as suppliers of liquidity leads to a better understanding of their success as financial intermediaries.
Keywords: banks; demand deposits; demand for money; transactions
JEL Codes: E40; E41; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transaction sizes (R12) | demand for money (E41) |
| transaction sizes (R12) | asset utilization for liquidity (G32) |
| liquidity constraints (E41) | precautionary demand for money (E41) |
| future taste shocks and risk aversion (D11) | precautionary demand for money (E41) |
| banks (G21) | demand for money (E41) |