Dynamic Consumer Cash Inventory Model

We study consumer cash inventory behavior by developing a dynamic model of forward-looking consumers and estimating structural parameters of the model using detailed consumer survey data. Consumers facing holding and withdrawal costs solve a discrete-time continuous-control dynamic programming problem to optimally use cash at the point of sale. Our findings suggest that it is crucial to account for persistent heterogeneity in consumer preferences to accurately measure the demand for cash and consumer welfare. We show that deteriorating access to cash triggers a bi-modal response. Some consumers substantially reduce or even stop the use of cash in favor of digital means of payment, while others exhibit a limited response and instead withdraw and hold larger amounts.