Technological change and the households’ demand for currency

It is shown that accounting for technology variations, across households and periods, is important to obtain theoretically consistent estimates of the demand for currency. An inventory model is presented where the withdrawal technology is explicitly modeled. Both the level and the interest rate elasticity of cash holdings depend on the withdrawal technology available to households. Empirical proxies for the household withdrawal technology, based on the diffusion of cash withdrawal points measured at city level, are used to test the model predictions on a panel of Italian household data over the 1993–2004 period.