Extensive Margins and the Demand for Money at Low Interest Rates

Abstract

We argue that the relevant monetary decision for the majority of U.S. households is not the fraction of assets to be held in interest‐bearing form, but whether to hold any such assets at all (we call this “the decision to adopt” the financial technology). We show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets. This implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations. We do so with the 1989 Survey of Consumer Finances. We find that (a) the elasticity of money demand is very small when the interest rate is small, (b) the probability that a household holds any amount of interest‐bearing assets is positively related to the level of financial assets, and (c) the cost of adopting financial technologies is negatively related to participation in a pension program. At intere...