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Precautionary demand for money in a monetary business cycle model

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  • Irina A. Telyukova
  • Ludo Visschers

Abstract

We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1142.

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Date of creation: Nov 2011
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Handle: RePEc:cte:werepe:we1142

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Keywords: Precautionary demand for money; Business cycle fluctuations; Money velocity fluctuations;

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  1. Irina A. Telyukova & Randall Wright, 2007. "A model of money and credit, with application to the credit card debt puzzle," Working Paper 0711, Federal Reserve Bank of Cleveland.
  2. Wang, Weimin & Shi, Shouyong, 2006. "The variability of velocity of money in a search model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 537-571, April.
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  7. Telyukova, Irina A., 2012. "Household Need for Liquidity and the Credit Card Debt Puzzle," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt0ww2c04z, Department of Economics, UC San Diego.
  8. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 247-274, March.
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Citations

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Cited by:
  1. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.
  2. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(3), pages 1148-1177.
  3. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2014. "Financial innovations, money demand, and the welfare cost of inflation," ECON - Working Papers, Department of Economics - University of Zurich 136, Department of Economics - University of Zurich.
  4. Dixon, Huw David & Pourpourides, Panayiotis M., 2012. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Cardiff Economics Working Papers E2012/3, Cardiff University, Cardiff Business School, Economics Section.
  5. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers, Federal Reserve Bank of St. Louis 2009-031, Federal Reserve Bank of St. Louis.

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