Baumol-Tobin model

The Baumol-Tobin model focuses on the optimal number of transactions for a household.

The most well-known example of an economic model that is based on such considerations is the Baumol-Tobin model.

The Baumol-Tobin model is an economic model of the transactions demand for money as developed independently by William Baumol (1952) and James Tobin (1956).

While the Baumol-Tobin model provides a microeconomic explanation for the form of the money demand function, it is generally too stylized to be included in modern macroeconomic models, particularly dynamic stochastic general equilibrium models.

Among his better-known contributions are the theory of contestable markets, the Baumol-Tobin model of transactions demand for money, Baumol's cost disease, which discusses the rising costs associated with service industries, and Pigou taxes.

A version of the model, the Baumol-Tobin model, has also been used to determine the money demand function, where a person's holdings of money balances can be seen in a way parallel to a firm's holdings of inventory.