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Homogeneity and the Transactions Demand for Money

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  • Chang, Fwu-Ranq

Abstract

The paper presents the properties of money demand implied by the Frenkel-Jovanovic (1980) inventory model. Without approximation, the money demand function is implicitly defined by the first-order condition of the model. From the implicit function, we show that the elasticities of money demand satisfy a set of homogeneity conditions. We also show that increasing transactions cost increases the cash flow elasticity, the interest elasticity (in absolute value) and the uncertainty elasticity, but decreases the transactions cost elasticity. If the ratio of cash-flow uncertainty to the transactions variable is small, then the interest elasticity is greater than 1/2. In contrast, it lies between $71 and 1/2 when the approximation method is applied.

Suggested Citation

  • Chang, Fwu-Ranq, 1999. "Homogeneity and the Transactions Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 720-730, November.
  • Handle: RePEc:mcb:jmoncb:v:31:y:1999:i:4:p:720-30
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    Cited by:

    1. Bar-Ilan, Avner & Perry, David & Stadje, Wolfgang, 2004. "A generalized impulse control model of cash management," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1013-1033, March.
    2. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
    3. Bar-Ilan, Avner & Marion, Nancy, 2013. "Demand for cash with intra-period endogenous consumption," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2668-2678.
    4. Baccarin, Stefano, 2009. "Optimal impulse control for a multidimensional cash management system with generalized cost functions," European Journal of Operational Research, Elsevier, vol. 196(1), pages 198-206, July.
    5. Rodriguez Mendizabal, Hugo, 2002. "Monetary Union and the Transaction Cost Savings of a Single Currency," Review of International Economics, Wiley Blackwell, vol. 10(2), pages 263-277, May.
    6. Avner Bar-Ilan, 2000. "Investment with an arithmetic process and lags," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(5), pages 203-206.
    7. García Cabello, Julia, 2017. "The future of branch cash holdings management is here: New Markov chains," European Journal of Operational Research, Elsevier, vol. 259(2), pages 789-799.
    8. Hugo Rodríguez, 1998. "The variability of money velocity in a generalized cash-in-advance model," Economics Working Papers 320, Department of Economics and Business, Universitat Pompeu Fabra.

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