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- Title
A NOTE ON THE USELESSNESS OF TRANSACTION DEMAND MODELS.
- Authors
ORR, DANIEL
- Abstract
Case M. Sprenkle (1969), in a refreshing departure from the elasticity-grubbing that constitutes most empirical work on money demand, examined predicted vs. reported levels of cash holdings in firms, using the equation derived by Baumol (1952) and Tobin (1956) as his predictor. Sprenkle concluded that compensating balance requirements, and not asset management decisions taken to cover transaction needs, are the most important data in explaining the amount of cash held by business firms. In this note, I argue that his results do not support his claim of showing "the uselessness of transaction demand models." Rather, they stem from (a) the inadequacy of the Baumol-Tobin (B-T) model as a representation of cash flows, and (b) the irrelevance of cash balance data contained in financial reports to empirical research on money holdings. I also show that Sprenkle's heavy reliance on the importance of compensating balances is misplaced.
- Subjects
COMPENSATORY balances; CORPORATE finance; DEMAND for money; MATHEMATICAL models of finance; CASH management; ASSET management
- Publication
Journal of Finance (Wiley-Blackwell), 1974, Vol 29, Issue 5, p1565
- ISSN
0022-1082
- Publication type
Article
- DOI
10.2307/2978560