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The firm demand for liquid assets in an inflationary environment

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Measures of inflation and the price level are added to the standard model of liquid asset demand and estimated with cross-section data on Brazilian manufacturing firms over a four-year period characterized by substantial inflation (annual rates of 19, 23, 34 and 35%). Results indicate that economies of scale exist in a model that is stable over time. Interest rates have a strong and elastic impact on liquid asset demand when inflation is explicitly controlled for although this result is not consistent across all subsets of data used. The usual assumption of a unitary price level elasticity of liquid asset demand is rejected and firms appear to conserve on liquid asset holdings as the rate of inflation increases suggesting more careful management of payments flows. Some of these findings contradict those of Ungar and Zilberfarb (1980). There are also some difference in behaviour across ownership groups: Brazilian firms do not exhibit economies of scale while multinationals do; and Brazilian firms adjust actual to desired balances faster than multinational firms.

Document Type: Research Article


Publication date: 2001-03-01

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