Cash management of foreign note holdings by banks

Abstract

This study investigates the holdings of foreign cash by individual Canadian banks. Since the number of bank branches varies greatly, such a study provides a test not only of the Baumol-Tobin model but also the Sprenkle reformulation. The latter suggested that the Baumol-Tobin model is of less relevance as the number of branches incrases. These results show that the Baumol Tobin model performs well in any event. It also shows the changes in bank behaviour in moving from a fixed to a floating exchange rate system.