Abstract
While the currency-deposit ratio plays an important role in monetary economics, only a limited amount of research has been done on it. The work that has been done has approached the subject from the demand side. A currency-deposit ratio demand function is developed, and, given the values of the arguments in the function - including the relative holding costs of currency to demand deposits--the equilibrium value of the currency-deposit ratio is determined. This approach has two shortcoming. First of all, it ignores supply conditions. While it is true that the public can have any currency-deposit ratio it desires, demand deposits are supplied by profit maximizing banks which can alter the relative holding costs of currency to demand deposits, thereby changing the public's desired currency-deposit ratio. Therefore a complete theoretical explanation of the behavior of the currency deposit ratio must include supply condition. In addition, the empirical testing of demand-oriented models requires reasonably accurate data on implicit payment of interest on demand deposits. While there is empirical evidence of implicit interest payment, there are no really satisfactory data on the extent of such payments. The models developed in this dissertation depart from previous work in that they are based on a market-oriented approach. Separate supply conditions are developed and combined with demand conditions based on previous research. Two models for the equilibrium currency-deposit ratio are derived as reduced forms from the structural supply and demand equation. While implicit interest paid on demand deposits is included in the supply and demand equation, and plays an important theoretical role in the models, it is not included among the ultimate explanatory variables in the reduced forms. The ultimate explanatory variables consist of...
Buck, Roland (1979). The currency-deposit ratio, a market-oriented approach. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -55988.