Money and the Size of Transactions

Consumers make transactions of different sizes over time. This paper shows that this fact can highlight many issues in monetary theory. First, it helps to explain the demand for money, and why should it be a store of value. Even if there are other stores of value, like capital, land, or bonds, with transaction costs, the model shows that there is still need for money for small transactions. The same approach is applied to commercial banks, as suppliers of a transaction technology that differs from cash in its cost structure. As a result consumers use cash for smaller transactions, and demand deposits for larger transactions. Finally, the paper shows that modeling banks as suppliers of liquidity leads to a better understanding of their role as financial intermediaries