Online Appendix for: International Evidence on Long-Run Money Demand
This appendix supports Staff Report 587. An earlier version of this Staff Report circulated as Working Paper 738.
This is what's in your wallet... and here's how you use it
Models of money demand, in the Baumol (1952)-Tobin (1956) tradition, describe optimal cash management policy in terms of when and how much cash to withdraw, an (s, S) policy. However, today, a vast array of instruments can be used to make payments, opening additional ways to control cash holdings. This paper utilizes data from the 2012 Diary of Consumer Payment Choice to simultaneously analyze payment instrument choice and withdrawals. We use the insights in Rust (1987) to extend existing models of payment instrument choice into a dynamic setting to study cash management. Our estimates show ...
Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation
This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank?s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is ...
Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions
This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast ...
On the Risk of Leaving the Euro
Following the sovereign debt crisis of 2012, some southern European countries have debated proposals to leave the Euro. We evaluate this policy change in a standard monetary model with seigniorage financing of the deficit. The main novel feature is that we depart from rational expectations while maintaining full rationality of agents in a sense made very precise. Our first contribution is to show that small departures from rational expectations imply that inflation upon exit can be orders of magnitude higher than under rational expectations. Our second contribution is to provide a framework ...
Online Appendix for: The Welfare Costs of Inflation
U.S. consumers' holdings and use of $100 bills
Conventional wisdom asserts that $100 bills are often associated with crime and foreign cash holdings, leading some commentators to call for their elimination; in light of this proposal, it is useful to examine the legal, domestic use of cash. This report uses new data from the 2012 Diary of Consumer Payment Choice (DCPC) to evaluate consumer use of $100 bills as a means of payment.
International Evidence on Long-Run Money Demand
We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily ...
Two Illustrations of the Quantity Theory of Money Reloaded
In this paper, we review the relationship between inflation rates, nominal interest rates, and rates of growth of monetary aggregates for a large group of OECD countries. We conclude that the low-frequency behavior of these series maintains a close relationship, as predicted by standard quantity theory models. In an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver very different high-frequency dynamics. We argue that these relationships are useful for policy design aimed at controlling inflation.
Long and Plosser Meet Bewley and Lucas
We develop a N-sector business cycle network model a la Long and Plosser (1983), featuring heterogenous money demand a la Bewley (1980) and Lucas (1980). Despite incomplete markets and a well-defined distribution of real money balances across heterogeneous households, the enriched N-sector network model remains analytically tractable with closed-form solutions up to the aggregate level. Relying on the tractability, we establish several important results: (i) The economy's input-output network linkages become endogenously time-varying over the business cycle?thanks to the influence of the ...