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- Title
A RATIONALIZATION OF THE PRECAUTIONARY DEMAND FOR CASH.
- Authors
Whalen, Edward L.
- Abstract
This article discusses the application of the logic of rational behavior to the precautionary demand for cash. There are three factors that affect the optimal size of precautionary cash balances: the cost of illiquidity; the opportunity cost of holding precautionary cash balances; and the average volume and variability of receipts and disbursements. The total cost of precautionary cash management is equal to the sum of the opportunity cost of holding cash and the expected cost of illiquidity. The result of the study states that although the precautionary and speculative motives for holding cash both deal with uncertainty, the model for the precautionary demand for cash relates the demand for cash to uncertainties regarding the pattern of receipts and disbursements. The speculative motive is more directly concerned with uncertainties regarding interest rates.
- Subjects
CASH management; DEMAND for money; DISBURSEMENTS; OPPORTUNITY costs; INTEREST rates; LIQUID assets
- Publication
Quarterly Journal of Economics, 1966, Vol 80, Issue 2, p314
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/1880695