Under what conditions do the poor hold cash in pairwise-trade models?

Ohik Kwon, Manjong Lee

Research output: Contribution to journalArticle

Abstract

Most existing pairwise-trade models of money predict that the poor may not hold any money in the presence of interest-bearing liquid assets. We resolve this seemingly implausible prediction by incorporating cash and interestbearing checking account into a standard search-theoretic model. If the transaction cost of a debit card is neither too small nor too large, there is a coexistence equilibrium in which the poor hold cash for their small transactions, whereas the rich hold interest-bearing deposits and use a debit card for their large transactions.

Original languageEnglish
Pages (from-to)237-252
Number of pages16
JournalJournal of Economic Theory and Econometrics
Volume23
Issue number3
Publication statusPublished - 2012 Sep

Keywords

  • Cash
  • Checking account
  • Coexistence puzzle
  • Debit card

ASJC Scopus subject areas

  • Economics and Econometrics

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