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- Title
THE DEMAND FOR COMPENSATING BALANCES.
- Authors
Meinster, David R.
- Abstract
This paper presents a compensating balance demand model which incorporates the basic motives which firms have for holding compensating balances. Since the motives are considered simultaneously, it is not simply a question of whether transactions balances are large enough to compensate banks for services rendered to depositors, as Orr and others have stated. Compensating services play a part in explaining money holding of business firms, even in competition. This implies that we must know much more about compensating service cost and revenue functions than we do now to fully understand the demand for money by firms. <BR> Although compensating balances contain policy implications, these implications are unclear in the case of open market operations because the theoretical relationship between the demand for compensating balances and money market rates is ambiguous, thus making it strictly an empirical issue. On the other hand, our model points out that the effectiveness of reserve requirement changes is improved by the presence of compensating balances because the demand for balances is affected in the same direction as the reserve requirement change. A lack of symmetry is also introduced because a change in reserve requirements alters, in the opposite direction, the sensitivity of demand for compensating balances to money market rate changes.
- Subjects
ECONOMIC demand; COMPENSATORY balances; MONEY market
- Publication
Southern Economic Journal, 1977, Vol 43, Issue 4, p1538
- ISSN
0038-4038
- Publication type
Article
- DOI
10.2307/1057118