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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2818.

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Date of creation: Apr 2001
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Handle: RePEc:cpr:ceprdp:2818

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Keywords: Firms' Money Demand; Measurement Error; Panel Data; Technological Change;

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  1. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 137-148, July.
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  3. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(5), pages 1061-79, October.
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  5. Olympia Bover & Nadine Watson, 2000. "Are there Economies of Scale in the Demand for Money by Firms? some Panel Data Estimates," Banco de Espa�a Working Papers 0008, Banco de Espa�a.
  6. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(2), pages 271-291, March.
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  9. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
  10. Casey B. Mulligan & Xavier Sala-i-Martin, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," NBER Working Papers 5504, National Bureau of Economic Research, Inc.
  11. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 79-113, July.
  12. Casey B. Mulligan & Xavier Sala-I-Martin, 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 285-343.
  13. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 137-167, January.
  14. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 71, pages 219.
  15. Casey B. Mulligan, . "The Demand for Money by Firms: Some Additional Empirical Results," University of Chicago - Population Research Center, Chicago - Population Research Center 97-1, Chicago - Population Research Center.
  16. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 169-172, January.
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Citations

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Cited by:
  1. Bover, Olympia & Watson, Nadine, 2001. "Are there Economies of Scale in the Demand for Money by Firms? Some Panel Data Estimates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2818, C.E.P.R. Discussion Papers.
  2. Robertson, Donald & Sarafidis, Vasilis & Symons, James, 2010. "IV Estimation of Panels with Factor Residuals," MPRA Paper 26166, University Library of Munich, Germany.
  3. Fischer, Andreas M, 2005. "Measuring Income Elasticity for Swiss Money Demand: What Do the Cantons Say About Financial Innovation?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5050, C.E.P.R. Discussion Papers.
  4. Bafile, Romina & Piergallini, Alessandro, 2011. "Firms’ Money Demand and Monetary Policy," MPRA Paper 29028, University Library of Munich, Germany.
  5. 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.
  6. Sarafidis, Vasilis, 2009. "GMM Estimation of Short Dynamic Panel Data Models With Error Cross-Sectional Dependence," MPRA Paper 25176, University Library of Munich, Germany.
  7. 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, Elsevier, vol. 30(1), pages 523-542, March.
  8. Andre C. Silva, 2014. "Rebalancing Frequency and the Welfare Cost of Inflation," FEUNL Working Paper Series wp587, Universidade Nova de Lisboa, Faculdade de Economia.

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