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Demand for Cash with Intra-Period Endogenous Consumption

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We study the demand for money when agents can optimally choose mean rates of consumption and cash holdings over a period. Consistent with empirical evidence, we find that agents do not smooth intra-period consumption. Instead, their rate of consumption is positively correlated with their cash position. This positive correlation depends on the volatility of the consumption process. When volatility is very low or very high, agents choose to consume at a relatively high rate immediately after a cash withdrawal, drawing down quite rapidly their cash balances. Later in the period, their rate of consumption and cash depletion is more restrained. This sizeable deviation from consumption smoothing is much less pronounced when volatility is moderate.

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  • Bar-Ilan, Avner & Marion, Nancy, "undated". "Demand for Cash with Intra-Period Endogenous Consumption," Working Papers WP2010/4, University of Haifa, Department of Economics.
    • Handle: RePEc:haf:huedwp:wp201004
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    Cited by:

    1. Huynh, Kim P. & Schmidt-Dengler, Philipp & Stix, Helmut, 2014. "Whenever and Wherever: The Role of Card Acceptance in the Transaction Demand for Money," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 472, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Kim Huynh & Philipp Schmidt-Dengler & Helmut Stix, 2014. "The Role of Card Acceptance in the Transaction Demand for Money," Staff Working Papers 14-44, Bank of Canada.
    3. Magnac, Thierry, 2017. "ATM foreign fees and cash withdrawals," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 117-129.
    4. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2015. "Consumer payment choice: Merchant card acceptance versus pricing incentives," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 130-141.

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    More about this item

    Keywords

    money demand; consumption smoothing; drift control;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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