Can Robbery and Other Theft Help Explain the Textbook Currency-demand Puzzle? Two Dreadful Models of Money Demand with an Endogenous Probability of Crime
AbstractThis paper attempts to explain one version of an empirical puzzle noted by Mankiw (2003): a Baumol-Tobin inventory-theoretic money demand equation predicts that the average U.S. adult should have held approximately $551.05 in currency and coin in 1995, while data show an average of $100. The models in this paper help explain this discrepancy using two assumptions: (1) the probabilities of being robbed or pick-pocketed, or having a purse snatched, depend on the amount of cash held; and (2) there are costs of being robbed other than loss of cash, such as injury, medical bills, lost time at work, and trauma. Two models are presented: a dynamic, stochastic model with both instantaneous and decaying noncash costs of robbery, and a revised version of the inventory-theoretic model that includes one-period noncash costs. The former model yields an easily interpreted first-order condition for money demand involving various marginal costs and benefits of holding cash. The latter model gives quantitative solutions for money demand that come much closer to matching the 1995 data--$75.98 for one plausible set of parameters. This figure implies that consumers held approximately $96 billion less cash in May 1995 than they would have in a world without crime. The modified Baumol-Tobin model predicts a large increase in household money demand in 2005, mostly due to reduced crime rates.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_529.
Date of creation: Mar 2008
Date of revision:
Contact details of provider:
Web page: http://www.levyinstitute.org
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-15 (All new papers)
- NEP-CBA-2008-03-15 (Central Banking)
- NEP-DGE-2008-03-15 (Dynamic General Equilibrium)
- NEP-MAC-2008-03-15 (Macroeconomics)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards).
If references are entirely missing, you can add them using this form.