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Scale Economies and Heterogeneity in Business Money Demand : The Italian Experience

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  • Ganugi, Piero
  • Grossi, Luigi
  • Ianulardo, Giancarlo
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    Abstract

    This paper investigates the demand for money by firms and the existence of economies of scales in order to evaluate the efficiency in the cash management of the Italian manufacturing industry. We estimate a money demand for cash elaborated by Fujiki and Mulligan (1996). Estimates differ from the previous literature firstly, because we use a choice dynamic model to overcome endogeneity problems in cash holdings; secondly, because we use an iterative procedure based on backward exclusion of firms from model estimation with which we point out the high heterogeneity of Italian companies in money demand. Our estimates show that the Italian Manufacturing industry, considered as whole, does not enjoy scale economies in money demand. Our iterative procedure points out that the cause of this result is to be ascribed to small firms which are characterized by thin cash money holdings and a consequently very modest opportunity cost. Once small size firms are removed from our data set our estimates reveal that money demand of medium and large size firms is different for high scale economies. This result, together with the fact that small firms’ cash balances are thin, implies the efficiency of Italian manufacturing industry.

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    Bibliographic Info

    Paper provided by University of Bath, Department of Economics in its series Department of Economics Working Papers with number 15962.

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    Date of creation: 2009
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    Handle: RePEc:eid:wpaper:15962

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    1. Ben-Zion, Uri, 1974. "The Cost of Capital and the Demand for Money by Firms: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 263-69, May.
    2. Francesca Lotti & Juri Marcucci, 2006. "Revisiting the empirical evidence on firmsÂ’ money demand," Temi di discussione (Economic working papers) 595, Bank of Italy, Economic Research and International Relations Area.
    3. Romer, David, 1987. "The monetary transmission mechanism in a general equilibrium version of the baumol-tobin model," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 105-122, July.
    4. Alvarez, Fernando E & Lippi, Francesco, 2007. "Financial Innovation and the Transactions Demand for Cash," CEPR Discussion Papers 6472, C.E.P.R. Discussion Papers.
    5. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
    6. 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, vol. 105(5), pages 1061-79, October.
    7. Merton H. Miller & Daniel Orr, 1968. "The Demand For Money By Firms: Extensions Of Analytic Results," Journal of Finance, American Finance Association, vol. 23(5), pages 735-759, December.
    8. Sprenkle, Case M, 1969. "The Uselessness of Transactions Demand Models," Journal of Finance, American Finance Association, vol. 24(5), pages 835-47, December.
    9. Uri Ben-Zion & Edi Karni, 1976. "The Utility of Money and the Transactions Demand for Cash," Canadian Journal of Economics, Canadian Economics Association, vol. 9(1), pages 165-71, February.
    10. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    11. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
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