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Interest Rate Elasticity (interest_rate + elasticity)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

Financial Innovation and the Transactions Demand for Cash

ECONOMETRICA, Issue 2 2009
Fernando Alvarez
We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We extend the Baumol,Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We characterize the solution of the model, which qualitatively reproduces several empirical patterns. We estimate the structural parameters using micro data and show that quantitatively the model captures important economic patterns. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, and the benefit of ATM ownership. [source]

CREDIT CONSTRAINTS IN THE MARKET FOR CONSUMER DURABLES: EVIDENCE FROM MICRO DATA ON CAR LOANS,

INTERNATIONAL ECONOMIC REVIEW, Issue 2 2008
Orazio P. Attanasio
We investigate the significance of borrowing constraints in the market for consumer loans. Using data from the Consumer Expenditure Survey on auto loan contracts we estimate the elasticities of loan demand with respect to interest rate and maturity. We find that, with the exception of high income households, consumers are very responsive to maturity and less responsive to interest rate changes. Both elasticities vary with household income, with the maturity elasticity decreasing and the interest rate elasticity increasing with income. We argue that these results are consistent with the presence of binding credit constraints in the auto loan market. [source]

The Functional Form Of The Demand For Euro Area M1

THE MANCHESTER SCHOOL, Issue 2 2003
Livio Stracca
A remarkable development seen in recent years is the pronounced decline in euro area M1 velocity vis,à,vis a moderate decline in short,term interest rates, which represent the most natural opportunity cost for M1, suggesting an increase in the interest rate elasticity of M1 demand. In fact, estimating a theoretically plausible and stable demand function for M1 in the euro area is possible if a functional form of money demand allowing for an interest rate elasticity decreasing in size with the level of the interest rate is imposed. This finding would apparently suggest that the decline in inflation and nominal interest rates in Europe experienced in the run,up to the euro should have ,naturally' brought about an increased degree of preference for liquidity without any fundamental change in agents' preferences. To test the validity of this conclusion, a time,varying parameters model is estimated through a Kalman filter on the level of real M1, which is able to test simultaneously the stability of the parameters and the functional form of the demand for euro area M1. In this case, results clearly suggest the double,log function to be very close to the true ,deep' functional form of M1 demand in the euro area, consistent with the findings of Chadha, Haldane and Janssen for the UK and of Lucas for the USA. At the same time, there is evidence of an increased interest rate elasticity in M1 demand in the most recent years, presumably associated with the transition to the new environment prevailing from the start of Stage Three of European Monetary Union. [source]