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Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy

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Author Info
Casey B. Mulligan
Xavier Sala-i-Martin ()

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Abstract

In this paper we argue that inventory models are probably not useful models of household money demand because the majority of households does not hold any interest bearing assets. The relevant decision for most people is not the fraction of assets to be held in interest bearing form, but whether to hold any of such assets at all. The implications of this realization are interesting and important. We find that (a) the elasticity of money demand is very small when the interest rate is small, (b) the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets, and (c) the cost of adopting financial technologies is positively related to age and negatively related to the level of education. Unlike the traditional methods of money demand estimation, our methodology allows for the estimation of the interest--elasticity at low values of the nominal interest rate. The finding that the elasticity is very small for interest rates below 5 percent suggests that the welfare costs of inflation are small. At interest rates of 6 percent, the elasticity is close to 0.5. We find that roughly one half of this elasticity can be attributed to the Baumol--Tobin or intensive margin and half of it can be attributed to the new adopters or extensive margin. The intensive margin is less important at lower interest rates and more important at higher interest rates.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 134.

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Date of creation: Aug 1995
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Handle: RePEc:upf:upfgen:134

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  1. Karni, Edi, 1973. "The Transactions Demand for Cash: Incorporation of the Value of Time into the Inventory Approach," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1216-25, Sept.-Oct. [Downloadable!] (restricted)
  2. Barro, Robert J, 1970. "Inflation, the Payments Period, and the Demand for Money," Journal of Political Economy, University of Chicago Press, vol. 78(6), pages 1228-63, Nov.-Dec.. [Downloadable!] (restricted)
  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, vol. 105(5), pages 1061-79, October.
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  1. Orazio Attanasio & Luigi Guiso & Tuillo Jappelli, 1998. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," NBER Working Papers 6593, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Luisa Fuster, 1995. "Altruism, Uncertain Lifetime, and the Distribution of Wealth," Economics Working Papers 150, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  3. 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!]
    Other versions:
  4. Pippow Ingo & Schoder Detlef, 2002. "The Demand for Stored Value Payment Instruments," Microeconomics 0204002, EconWPA. [Downloadable!]
  5. Komárek Luboš & Melecký Martin, 2001. "Demand for Money in the Transition Economy : The Case of the Czech Republic 1993–2001," The Warwick Economics Research Paper Series (TWERPS) 614, University of Warwick, Department of Economics. [Downloadable!]
  6. José V. Rodríguez Mora, 1995. "Shared Knowledge," Economics Working Papers 144, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  7. Cysne, Rubens Penha & Maldonado, Wilfredo L. & Monteiro, Paulo Klinger, 2004. "Inflation and Income Inequality: A Shopping-Time Aproach," Economics Working Papers (Ensaios Economicos da EPGE) 566, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
    Other versions:
  8. Chris Crowe, 2004. "Inflation, Inequality and Social Conflict," Money Macro and Finance (MMF) Research Group Conference 2004 69, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  9. Fiorella de Fiore, 2000. "The optimal inflation tax when taxes are costly to collect," Working Paper Series 38, European Central Bank. [Downloadable!]
  10. Komárek Luboš & Melecký Martin, 2001. "Currency Substitution in the Transition Economy : A Case of the Czech Republic 1993-2001," The Warwick Economics Research Paper Series (TWERPS) 613, University of Warwick, Department of Economics. [Downloadable!]
  11. Antonio Ciccone & Kiminori Matsuyama, 1995. "Start-up Costs and Pecuniary Externalities as Barriers to Economic Development," Economics Working Papers 142, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  12. Amable, Bruno & Chatelain, Jean-Bernard & De Bandt, Olivier, 1998. "Stability versus efficiency of the banking sector and economic growth," CEPREMAP Working Papers (Couverture Orange) 9811, CEPREMAP. [Downloadable!]
  13. Jean-Bernard Chatelain & Bruno Amable, 2001. "Can financial infrastructures foster economicdevelopment?," Post-Print halshs-00112551_v1, HAL. [Downloadable!]
  14. Nir Dagan, 1994. "Recontracting and Competition," Economics Working Papers 152, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 1996. [Downloadable!]
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  15. Sjaak Hurkens & Nir Vulkan, 1996. "Information Acquisition and Entry," Economics Working Papers 155, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  16. Casey B. Mulligan & Xavier X. Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," NBER Working Papers 5954, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Casey B. Mulligan, 1997. "The demand for money by firms: some additional empirical results," Discussion Paper / Institute for Empirical Macroeconomics 125, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  18. Alexander L. Wolman, 1997. "Zero inflation and the Friedman rule: a welfare comparison," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-21. [Downloadable!]
  19. Radhika Lahiri & Elisabetta Magnani, 2004. "On Skill Heterogeneity and Inflation," School of Economics and Finance Discussion Papers and Working Papers Series 181, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
  20. Fiorella de Fiore & Pedro Teles, 2002. "The optimal mix of taxes on money, consumption and income," Working Paper Series 135, European Central Bank. [Downloadable!]
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  21. Daron Acemoglu & Fabrizio Zilibotti, 1996. "Agency Costs in the Process of Development," Economics Working Papers 157, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
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