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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Under What Conditions Do the Poor Hold Cash in Pairwise-Trade Models?

Vol.23, No.3, September , 237–252



  •   (Korea University)

  •   (Korea University)

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Abstract  

Most existing pairwise-trade models of money predict that the poor may not hold any money in the presence of interest-bearing liquid assets. We resolve this seemingly implausible prediction by incorporating cash and interestbearing checking account into a standard search-theoretic model. If the transaction cost of a debit card is neither too small nor too large, there is a coexistence equilibrium in which the poor hold cash for their small transactions, whereas the rich hold interest-bearing deposits and use a debit card for their large transactions.


Keywords
   Cash, Checking account, Debit card, Coexistence puzzle

JEL classification codes
   E40, E41
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