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Are there economies of scale in the demand for money by firms? Some panel data estimates

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  • Bover, Olympia
  • Watson, Nadine

Abstract

We estimate scale elasticities in firms' money demand using panel data. Our main data set is a sample of Spanish companies observed over 1983-96. We also analyse comparable UK and US data sets. We find that the errors in money demand equations contain two terms correlated with sales: first, a permanent firm effect capturing differences in managerial efficiency, efficiency wages, technological sophistication; second, a measurement error in sales, probably because cash holdings are end-of-period whereas sales are annual measures. We show that failure to control for them results in important biases. Sales elasticity estimates for Spain increase substantially jointly considering correlated fixed effects and measurement error. Additionally, our estimates indicate declining sales elasticity from mid-1980s to mid-1990s, a period of increasing financial innovations. This suggests that financial innovations reduce money demand mainly by reducing the sales elasticity. We also estimate interest rate elasticities using both aggregate and firm specific rates.
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  • Bover, Olympia & Watson, Nadine, 2005. "Are there economies of scale in the demand for money by firms? Some panel data estimates," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1569-1589, November.
    • Handle: RePEc:eee:moneco:v:52:y:2005:i:8:p:1569-1589
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    2. Edoardo Rainone, 2022. "Currency demand at negative policy rates," Temi di discussione (Economic working papers) 1359, Bank of Italy, Economic Research and International Relations Area.
    3. Andre C. Silva, 2011. "Individual and aggregate money demands," Nova SBE Working Paper Series wp557, Universidade Nova de Lisboa, Nova School of Business and Economics.
    4. Fischer, Andreas M., 2007. "Measuring income elasticity for Swiss money demand: What do the cantons say about financial innovation?," European Economic Review, Elsevier, vol. 51(7), pages 1641-1660, October.
    5. Liu, Jin-Tan & Tsou, Meng-Wen & Wang, Ping, 2008. "Differential cash constraints, financial leverage and the demand for money: Evidence from a complete panel of Taiwanese firms," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 523-542, March.
    6. Bover, Olympia & Watson, Nadine, 2005. "Are there economies of scale in the demand for money by firms? Some panel data estimates," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1569-1589, November.
    7. Fischer, Andreas M., 2014. "Immigration And Large Banknotes," Macroeconomic Dynamics, Cambridge University Press, vol. 18(4), pages 899-919, June.
    8. André C. Silva, 2012. "Rebalancing Frequency and the Welfare Cost of Inflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 153-183, April.
    9. Truong Trinh & Phan Thi Thuy Mai, 2016. "The Determinants of Corporate Liquidity in Real Estate Industry: Evidence from Vietnam," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 1-21, July.
    10. Piero Ganugi & Luigi Grossi & Giancarlo Ianulardo, 2015. "Scale Economies And Heterogeneity In Business Money Demand: The Italian Experience," Bulletin of Economic Research, Wiley Blackwell, vol. 67(2), pages 146-165, April.
    11. Fuente, Gabriel de la & Velasco, Pilar, 2020. "Capital structure and corporate diversification: Is debt a panacea for the diversification discount?," Journal of Banking & Finance, Elsevier, vol. 111(C).
    12. Andrew Benito & John Whitley, 2003. "Implicit interest rates and corporate balance sheets: an analysis using aggregate and disaggregated UK data," Bank of England working papers 193, Bank of England.
    13. Le Duc Hoang & Phi Long Tran & Thu Phuong Ta & Duy Minh Vu, 2018. "Determinants of corporate cash holding: evidence from UK listed firms," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(3), pages 561-569, June.
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    15. Hermilson Velásquez & Francisco Zuluaga Díaz, 2005. "Demanda de dinero al nivel de la firma: el caso colombiano," Revista Ecos de Economía, Universidad EAFIT, October.
    16. Sarafidis, Vasilis, 2009. "GMM Estimation of Short Dynamic Panel Data Models With Error Cross-Sectional Dependence," MPRA Paper 25176, University Library of Munich, Germany.
    17. Robertson, Donald & Sarafidis, Vasilis, 2015. "IV estimation of panels with factor residuals," Journal of Econometrics, Elsevier, vol. 185(2), pages 526-541.
    18. Paul Natke & Gregory Falls, 2010. "Economies of scale and the demand for money," Small Business Economics, Springer, vol. 35(3), pages 283-298, October.
    19. Pablo Hernández de Cos & Isabel Argimón & José Manuel González-Páramo, 2004. "Public Ownership and Business Performance in the Spanish Manufacturing Sector, 1983-1996," Public Finance Review, , vol. 32(2), pages 148-182, March.
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    21. Bernardino Adão & André C. Silva, 2015. "Increased strength of monetary policy," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    22. Adão, Bernardino & Silva, André C., 2020. "The effect of firm cash holdings on monetary policy," European Economic Review, Elsevier, vol. 128(C).
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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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