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Are there economies of scale in the demand for money by firms? Some panel data estimates

  • Bover, Olympia
  • Watson, Nadine

We estimate scale elasticities in firms' money demand using panel data. Our main data set is a sample of Spanish companies observed over 1983-96. We also analyse comparable UK and US data sets. We find that the errors in money demand equations contain two terms correlated with sales: first, a permanent firm effect capturing differences in managerial efficiency, efficiency wages, technological sophistication; second, a measurement error in sales, probably because cash holdings are end-of-period whereas sales are annual measures. We show that failure to control for them results in important biases. Sales elasticity estimates for Spain increase substantially jointly considering correlated fixed effects and measurement error. Additionally, our estimates indicate declining sales elasticity from mid-1980s to mid-1990s, a period of increasing financial innovations. This suggests that financial innovations reduce money demand mainly by reducing the sales elasticity. We also estimate interest rate elasticities using both aggregate and firm specific rates.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 8 (November)
Pages: 1569-1589

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Handle: RePEc:eee:moneco:v:52:y:2005:i:8:p:1569-1589
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. 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.
  2. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
  3. Olympia Bover & Nadine Watson, 2000. "Are there Economies of Scale in the Demand for Money by Firms? some Panel Data Estimates," Banco de Espa�a Working Papers 0008, Banco de Espa�a.
  4. Casey B. Mulligan, . "The Demand for Money by Firms: Some Additional Empirical Results," University of Chicago - Population Research Center 97-1, Chicago - Population Research Center.
  5. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
  6. Orazio Attanasio & Luigi Guiso & Tullio Jappelli, 1998. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Households' Data," CSEF Working Papers 03, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Books, National Bureau of Economic Research, Inc, number frie59-1, January.
  8. 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.
  9. 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.
  10. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  11. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 137-148, July.
  12. Sala-i-Martin, X. & Mulligan, C.B., 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Papers 671, Yale - Economic Growth Center.
  13. Zvi Griliches & Jerry A. Hausman, 1984. "Errors in Variables in Panel Data," NBER Technical Working Papers 0037, National Bureau of Economic Research, Inc.
  14. 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.
  15. Hiroshi Fujiki & Casey B. Mulligan, 1996. "Production, Financial Sophistication, and the Demand for Money by Households and Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(1), pages 65-103, July.
  16. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219.
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