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Homogeneity and the Transactions Demand for Money

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  • Chang, Fwu-Ranq

Abstract

The paper presents the properties of money demand implied by the Frenkel-Jovanovic (1980) inventory model. Without approximation, the money demand function is implicitly defined by the first-order condition of the model. From the implicit function, we show that the elasticities of money demand satisfy a set of homogeneity conditions. We also show that increasing transactions cost increases the cash flow elasticity, the interest elasticity (in absolute value) and the uncertainty elasticity, but decreases the transactions cost elasticity. If the ratio of cash-flow uncertainty to the transactions variable is small, then the interest elasticity is greater than 1/2. In contrast, it lies between $71 and 1/2 when the approximation method is applied.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 31 (1999)
Issue (Month): 4 (November)
Pages: 720-30

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Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:4:p:720-30

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Bar-Ilan, Avner & Marion, Nancy, . "Demand for Cash with Intra-Period Endogenous Consumption," Working Papers WP2010/4, University of Haifa, Department of Economics, revised 01 Sep 2010.
  2. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  3. Bar-Ilan, Avner & Perry, David & Stadje, Wolfgang, 2004. "A generalized impulse control model of cash management," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1013-1033, March.
  4. Avner Bar-Ilan, 2000. "Investment with an arithmetic process and lags," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(5), pages 203-206.
  5. Hugo Rodríguez, 1998. "Monetary unions and the transaction cost savings of a single currency," Economics Working Papers 291, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Hugo Rodríguez, 1998. "The variability of money velocity in a generalized cash-in-advance model," Economics Working Papers 320, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Baccarin, Stefano, 2009. "Optimal impulse control for a multidimensional cash management system with generalized cost functions," European Journal of Operational Research, Elsevier, vol. 196(1), pages 198-206, July.

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