Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Households' Data

Contents:

Author Info

  • Orazio Attanasio

    ()
    (University College London, IFS and NBER)

  • Luigi Guiso

    ()
    (University of Sassari, Ente Luigi Einaudi and CEPR)

  • Tullio Jappelli

    ()
    (CSEF, Università di Salerno, and CEPR)

Abstract

How far can shoe-leather go in explaining the welfare cost of inflation? Using a unique set of microeconomic data on households, we estimate the parameters of the demand for money derived from a generalized Baumol-Tobin model. Our data set contains information on average holdings of cash, on deposits and other interest bearing accounts, on the number of trips to the bank, on the size of withdrawals and on the ownership and use of ATM cards. We model the adoption of new transaction technologies and use these estimates to correct for the selectivity bias induced by some households choosing to hold no interest bearing assets and some to use an ATM card. The interest rate and expenditure flow elasticities of the demand for cash are close to the theoretical values implied by standard inventory models. However, we find significant differences between the individuals with an ATM card and those without. The estimates of the demand for cash allow us to calculate a measure of the welfare cost of inflation analogous to Bailey's triangle, but based on a rigorous microeconometric framework. The welfare cost of inflation varies considerably within the population, but never turns out to be very large (about 0.1 percent of consumption or less). Our results are robust to various changes in the specification. In addition to the main results based on the average stock of cash held, we provide some evidence based on the number of trips to the bank and on the average withdrawals that confirm our basic findings.

Download Info

If 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.
File URL: http://www.csef.it/WP/wp3.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 03.

as in new window
Length:
Date of creation: 01 May 1998
Date of revision:
Publication status: Published in Journal of Political Economy, April 2002, vol. 110, pages 317-352
Handle: RePEc:sef:csefwp:03

Contact details of provider:
Postal: I-80126 Napoli
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Email:
Web page: http://www.csef.it/
More information through EDIRC

Related research

Keywords: demand for money; financial innovation; welfare cost of inflation;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
  2. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
  3. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
  4. Casey B. Mulligan & Xavier X. Sala-i-Martin & Frederic S. Mishkin & Jonas D. M. Fisher, 1997. "The optimum quantity of money: theory and evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 687-724.
  5. James Bullard & Steven Russell, 1998. "How costly is sustained low inflation for the U.S. economy?," Working Papers 1997-012, Federal Reserve Bank of St. Louis.
  6. Bomberger, William A, 1993. "Income, Wealth, and Household Demand for Deposits," American Economic Review, American Economic Association, vol. 83(4), pages 1034-44, September.
  7. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
  8. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  9. Mulligan, Casey B & Sala-i-Martin, Xavier, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," CEPR Discussion Papers 1358, C.E.P.R. Discussion Papers.
  10. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
  11. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  12. Casey B. Mulligan & Xavier Sala-i-Martin, 2000. "Extensive Margins and the Demand for Money at Low Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 961-991, October.
  13. 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.
  14. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  15. Ramon Marimon & Juan Pablo Nicolini & Pedro Teles, 1997. "Electronic money: the end of inflation?," Discussion Paper / Institute for Empirical Macroeconomics 122, Federal Reserve Bank of Minneapolis.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:03. See general 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: (Lia Ambrosio).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.