Working Paper: NBER ID: w13416
Authors: Fernando E. Alvarez; Francesco Lippi
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 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.
Keywords: Financial Innovation; Cash Management; Money Demand; Household Behavior
JEL Codes: E31; E4; E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial innovations (O16) | number of cash withdrawals (E41) |
| financial innovations (O16) | average size of withdrawals (D14) |
| financial innovations (O16) | average cash balances at time of withdrawal (D14) |
| financial innovations (O16) | elasticity of money demand with respect to interest rates (E41) |
| financial innovations (O16) | elasticity of money demand with respect to expenditures (E41) |
| financial innovations (O16) | welfare costs associated with inflation (D69) |
| financial innovations (O16) | benefits of ATM ownership (G21) |