Abstract:Baumol developed an equation of demand for money for the transaction motive. It is affected positively by cost per withdrawal and negatively by the interest loss resulting from holding cash. The present paper suggests modifying the basic and simplified Baumol approach by adding another element to the transaction equation. Availability of cash encourages spontaneous purchases resulting in customer losses. Through cost minimization with respect to three elements instead of two as in the original Baumol equation,… Show more
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