Optimal planning under transaction costs: The demand for money and other assets
Abstract A dynamic, continuous-time, inventory optimization model of household behavior is developed and analyzed. In this model, the household is allowed to hold stocks of money and of a single consumption good. A flow of consumption is achieved by depleting the inventory of the consumption good. The household maximizes the present value of the flow of utility, a function only of the rate of consumption. It is found that if the initial stock of the good is positive, there will be a positive demand for both the good and cash balances at each point in time. Further, once purchasing of the good has begun, it occurs continuously thereafter, and the rate of purchase increases with time. The consumption good inventory and the rate of consumption decrease monotonically. Comparative dynamics results are described for a certain class of transaction cost and utility functions.