Baumol–Tobin model

Abstract: This note considers a stochastic version of the Baumol-Tobin model of the demand for money. A dynamic demand function is derived for the case in which independent variables change to new, steady-state values. The (S, s) inventory policy is shown to give rise to an aggregate, partial-adjustment equation with a variable adjustment speed. The methodology is that introduced to target-threshold models by Milbourne, Buckholtz, and Wasan (1983) in their study of the Miller-Orr model.

Abstract: This paper is a version of Romer’s general equilibrium interpretation of the Baumol-Tobin model It investigates the implications of modelling money demand as arising endogenously from costs associated with trading in asset markets for the behavior of the real interest rate Under a particular rule for tax policy I look at the implications for real and nominal rates of an unexpected shock to in‡ation ¤I would like to thank Andy Atkeson for all his help For various reasons I am also grateful to Fabrizio Perri, Morris Davis, Kendall King and the Thouron Award

Abstract: U.S. consumers' demand for cash is estimated with new panel micro data for 2008-2010 using econometric methodology similar to Mulligan and Sala-i-Martin (2000); Attanasio, Guiso, and Jappelli (2002); and Lippi and Secchi (2009). We extend the Baumol-Tobin model to allow for credit card payments and revolving debt, as in Sastry (1970). With interest rates near zero, cash demand by consumers using credit cards for convenience (without revolving debt) has the same small, negative, interest elasticity as estimated in earlier periods and with broader money measures. However, cash demand by consumers using credit cards to borrow (with revolving debt) is interest inelastic. These findings may have aggregate implications for the welfare cost of inflation because then nontrivial share of consumers who revolve credit card debt are less likely to switch from cash to credit. In the 21st century, consumers get cash from bank and nonbank sources with heterogeneous transactions costs, so withdrawal location is essential to identify cash demand properly.