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Differential cash constraints, financial leverage and the demand for money: Evidence from a complete panel of Taiwanese firms

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  • Liu, Jin-Tan
  • Tsou, Meng-Wen
  • Wang, Ping

Abstract

This paper studies firms' demand for money by developing a differential-cash-constraint framework with firms' entire wage bills requiring cash in advance and a fraction of investment purchases being financed by credits. In addition to conventional scale and opportunity-cost factors, firms' financial status and profitability are crucial determinants for their money demand behavior. Employing a new data set consisting of a panel of Taiwanese firms over 1990-97, our econometric analysis lends empirical support to our theory. The estimates suggest that economies of scale in firms' cash management are present and that lower financial leverage or higher profitability raises money demand significantly.

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  • Liu, Jin-Tan & Tsou, Meng-Wen & Wang, Ping, 2008. "Differential cash constraints, financial leverage and the demand for money: Evidence from a complete panel of Taiwanese firms," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 523-542, March.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:523-542
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    4. Ping Wang & Danyang Xie, 2013. "Real Effects of Money Growth and Optimal Rate of Inflation in a Cash-in-Advance Economy with Labor-Market Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1517-1546, December.
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