TY  - JOUR
AU  - Alvarez,Fernando E.
AU  - Lippi,Francesco
TI  - Financial Innovation and the Transactions Demand for Cash
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13416
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13416
L1  - http://www.nber.org/papers/w13416.pdf
N1  - Author contact info:
Fernando E. Alvarez
University of Chicago
Department of Economics
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-4412
Fax: 773/702-8490
E-Mail: f-alvarez1@uchicago.edu

Francesco Lippi
University of Sassari
Department of Economics
and
EIEF
via Sallustiana, 62
00184 Rome - Italy
E-Mail: flippi@uniss.it
AB  - 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.
ER  -