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The demand for money, financial innovation, and the welfare cost of inflation: an analysis with household data

Attanasio, O.P.; Guiso, L.; Jappelli, T.; (2002) The demand for money, financial innovation, and the welfare cost of inflation: an analysis with household data. Journal of Political Economy , 110 (2) pp. 317-351. 10.1086/338743. Green open access

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Abstract

We use microeconomic data on households to estimate the parameters of the demand for currency derived from a generalized Baumol-Tobin model. Our data set contains information on average currency, deposits, and other interest-bearing assets; the number of trips to the bank; the size of withdrawals; and ownership and use of ATM cards. We model the demand for currency accounting for adoption of new transaction technologies and the decision to hold interest-bearing assets. The interest rate and expenditure flow elasticities of the demand for currency are close to the theoretical values implied by standard inventory models. However, we find significant differences between individuals with an ATM card and those without. The estimates of the demand for currency allow us to calculate a measure of the welfare cost of inflation analogous to Bailey's triangle, but based on a rigorous microeconometric framework. The welfare cost of inflation varies considerably within the population but never turns out to be very large (about 0.1 percent of consumption or less). Our results are robust to various changes in the econometric specification. In addition to the main results based on the average stock of currency, the model receives further support from the analysis of the number of trips to and average withdrawals from the bank and the ATM.

Type: Article
Title: The demand for money, financial innovation, and the welfare cost of inflation: an analysis with household data
Open access status: An open access version is available from UCL Discovery
DOI: 10.1086/338743
Publisher version: http://dx.doi.org/10.1086/338743
Language: English
Additional information: Published by University of Chicago Press. Please see http://eprints.ucl.ac.uk/15206/ for the Centre for Economic Policy Research (CEPR) discussion paper, and http://eprints.ucl.ac.uk/15207/ for the NBER Working Paper version, and http://eprints.ucl.ac.uk/19454/ for the CSEF working paper version
Keywords: JEL classification: E31, E41, D12. Households, inflation, money
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/12697
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