Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

E41: Demand for Money

Cash Burns: An Inventory Model with a Cash-Credit Choice

Fernando Alvarez, Francesco Lippi

We present a dynamic cash-management model where agents choose whether to pay with cash or credit at every point in time. In the model credit usage depends on the current stock of cash, a novel result that matches recent micro evidence on household’s payment choices. The optimality of such decision rule is novel and cannot be obtained by models where cash-credit decisions are made at the “beginning” of each period. We discuss how to use the model to account for cross country-evidence on the intensity of credit usage and for several statistics on the size and frequency of cash withdrawals.