Financial Innovation and the Transactions Demand for Cash

Fernando Alvarez and Francesco Lippi. Econometrica 77(2) March 2009: 363-402.

Several studies report interest rate elasticities for money demand below one half, the value predicted by economic models. It is also widely documented that money holdings decrease as new technologies to economize in the use of cash are introduced. This paper develops a dynamic inventory model for cash balances. The key new ingredient of Alvarez and Lippi's model is the assumption that agents have random opportunities to withdraw cash at no costs. LINK