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Working Paper

A Micro View of the Money Transactions Market

This paper provides a micro-oriented, price-theoretic perspective on the transactions money market. Such a perspective is useful for three reasons. First, it emphasizes that the supply of transactions money will depend on, among other things, the state of technology in the transactions-money producing industry, the price of transactions money, the cost of factors of production utilized to manufacture transactions money, and the prices of substitutes for and complements of transactions money--types of determinants that are commonly taken into account in the specification of a supply curve of commodities other than transactions money but have been given either little attention or ignored in the case of transactions money. Second, a micro perspective can also deal with the fact that transactions money is not a homogeneous good--provided that the costs of transforming/transporting the different money forms to a homogeneous state are specifiable (the divisia approach to monetary aggregation notably takes a percentage transformation/ transportation cost approach). Third, a micro perspective affords a framework for comparative statics--i .e., for estimating the a1 locative and distributive consequences of such aspects of the market as reserve requirements (a percentage tax on regulated transactions money producers), interest-rate cei1ings (transactions money price floors), and improvements in technology Or innovations (outward shifts of the transact ions money supply curve--contrary to the currently popular approach, which models such innovations as inward shifts of the demand curve for transactions money).

Suggested Citation

Zupan, Mark. 1982. “A Micro View of the Money Transactions Market.” Federal Reserve Bank of Cleveland, Working Paper No. 82-03.