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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
Under What Conditions Do the Poor Hold Cash in Pairwise-Trade Models?
Vol.23, No.3, September 2012, 237–252
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Ohik Kwon
(Korea University)
Manjong Lee
(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.
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Keywords
Cash, Checking account, Debit card, Coexistence puzzle |
JEL classification codes
E40, E41 |
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