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

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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)

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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.

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

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Date of creation: 01 May 1998
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Handle: RePEc:sef:csefwp:03

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Related research
Keywords: demand for money financial innovation welfare cost of inflation

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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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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.:
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    Other versions:
  4. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 687-715, November.
    Other versions:
  5. 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. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!]
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  8. Sprenkle, Case M, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-84, Fall. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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  10. 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.
  11. Martin Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, 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.)

  1. Helmut Stix, 2003. "How Do Debit Cards Affect Cash Demand? Survey Data Evidence," Working Papers 82, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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  2. Björn Fischer & Petra Köhler & Franz Seitz, 2004. "The demand for euro area currencies," Working Paper Series 330, European Central Bank. [Downloadable!]
  3. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002. "Optimal Monetary Policy," NBER Working Papers 9402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department. [Downloadable!]
  5. Ari Hyytinen & Tuomas Takalo, 2004. "Multihoming in the Market for Payment Media: Evidence from Young Finnish Consumers," Discussion Papers 893, The Research Institute of the Finnish Economy. [Downloadable!]
    Other versions:
  6. Olympia Bover & Nadine Watson, 2000. "Are there Economies of Scale in the Demand for Money by Firms? some Panel Data Estimates," Banco de España Working Papers 0008, Banco de España. [Downloadable!]
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  7. Columba, Francesco, 2007. "The Speed of Euro Adoption," MPRA Paper 5547, University Library of Munich, Germany. [Downloadable!]
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  8. Dario Focarelli & Fabio Panetta, 2002. "Are mergers beneficial to consumers? evidence from the market for bank deposits," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 469-493. [Downloadable!]
  9. Fernando E. Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," NBER Working Papers 13416, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Minford, Patrick & Nowell, Eric & Webb, Bruce, 2005. "Would price-level targeting destabilise the economy?," Cardiff Economics Working Papers E2005/12, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  11. Xavier Ragot, 2005. "A theory of low inflation in a non Ricardian economy with credit Constraints," PSE Working Papers 2005-20, PSE (Ecole normale supérieure). [Downloadable!]
  12. Albanesi, Stefania, 2003. "Optimal and Time-Consistent Monetary and Fiscal Policy with Heterogeneous Agents," CEPR Discussion Papers 3713, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Fabio Panetta & Dario Focarelli, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Italian Market for Bank Deposits," CEIS Research Paper 10, Tor Vergata University, CEIS. [Downloadable!]
  14. Helmut Stix, 2004. "The Impact of ATM Transactions and Cashless Payments on Cash Demand in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 90-105, May. [Downloadable!]
  15. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  16. Burkhard Heer & Alfred Maussner & Paul D. McNelis, 2007. "The Money-Age Distribution: Empirical Facts and Limited Monetary Models," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  17. Dario Focarelli & Fabio Panetta, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," American Economic Review, American Economic Association, vol. 93(4), pages 1152-1172, September. [Downloadable!] (restricted)
  18. Dario Focarelli & Fabio Panetta, 2002. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," Temi di discussione (Economic working papers) 448, Bank of Italy, Economic Research Department. [Downloadable!]
  19. Sònia Muñoz, 2006. "Habit Formation and Persistence in Individual Asset Portfolio Holdings: The Case of Italy," IMF Working Papers 06/29, International Monetary Fund. [Downloadable!]
  20. Stefania Albanesi, . "The Time Consistency of Optimal Monetary Policy with Heterogeneous Agents," Working Papers 207, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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