(DP 1979-15) A Short Note on Economies of Scale in Transactions Demand for Money

Ricardo D. Ferrer


This note points to a possible error in Baumol's, and later Brunner's and Meltzer's formulation of the transactions demand for cash. The argument of the paper is rather simple. After showing that the optimum lot size of cash withdrawals, C, is independent of deposits I, one can no longer assume as if I can vary continuously. In other words, differentiation of a cost function with respect to I is illegitimate if I can only vary in multiples of C. On the basis of this argument the transactions demand for cash is reformulated, and the basic result is that the demand function is discontinuous. A method to test the hypothesis is indicated which suggests that Meltzer's cross section test of the Baumol hypothesis is wrong.

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