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New Model of Current Account Balances

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  • Levente Kovács

    () (University of Miskolc)

Abstract

Managing current account balances – defining the value of the necessary closing level – is perhaps the most exciting daily routine activity of corporate financial managers. The relevant discussion of this subject in Corporate Finance by Brealey and Myers, one of the most popular manuals of today’s higher education in finances, refers to research conducted over 60 years ago. This manual applies the Baumol model to current account balance management, starting from the costs of simple inventory management. An enhancement of the above is the Miller-Orr model, which restricts the volatility of the cash balances between an upper and the lower limit, and defines the value at one-third as the return point. Our globalised world is characterized by electronic banking, which has fundamentally changed the entire system of finances. Research done on figures of the 2000s led to results that were different than before. According to new findings, in modern accelerated cash management the level of current account balances is not determined by the assumed “inventory management costs” (through the development of electronic methods, they have decreased drastically, anyhow), rather the habits of cash transaction management.

Suggested Citation

  • Levente Kovács, 2010. "New Model of Current Account Balances," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 6(02), pages 31-35.
  • Handle: RePEc:mic:tmpjrn:v:6:y:2010:i:02:p:31-35
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    File URL: http://tmp.gtk.uni-miskolc.hu/volumes/2010/02/TMP_2010_02_05.pdf
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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