Cash management and the demand for money by firms

Abstract

This paper examines the implications for a firm's demand for money of cash management innovations that make it feasible for the firm to alter its requirements for transaction balances by utilizing cash management services which are either purchased from outside suppliers or produced in-house. An optimization model of the money demand/cash management decision is developed and analyzed. The results indicate that this added flexibility lowers the responsiveness of money demand to changes in the scale and variability of the firm's transaction, and increases the interest rate sensitivity of its demand for money. Regression results consistent with the theoretical results are presented.