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Precautionary Demand for Money in a Monetary Business Cycle Model

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  • Irina A. Telyukova

    (University of California, San Diego)

  • Ludo Visschers

    (Simon Fraser University)

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 Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0906.

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Length: 43 pages
Date of creation: 2009
Date of revision: Jun 2009
Handle: RePEc:eie:wpaper:0906

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  1. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  2. Alvarez, Fernando E & Lippi, Francesco, 2007. "Financial Innovation and the Transactions Demand for Cash," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6472, C.E.P.R. Discussion Papers.
  3. 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.
  4. Irina A. Telyukova & Randall Wright, 2006. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," 2006 Meeting Papers, Society for Economic Dynamics 45, Society for Economic Dynamics.
  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  6. Telyukova, Irina, 2008. "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 qt4c67r71r, Department of Economics, UC San Diego.
  7. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
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  16. Miquel Faig & Belen Jerez, 2006. "Precautionary Balances and the Velocity of Circulation of Money," 2006 Meeting Papers, Society for Economic Dynamics 457, Society for Economic Dynamics.
  17. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers, Queen's University, Department of Economics 966, Queen's University, Department of Economics.
  18. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, Elsevier, vol. 20(2), pages 177-181.
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Citations

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Cited by:
  1. Telyukova, Irina, 2008. "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 qt4c67r71r, Department of Economics, UC San Diego.
  2. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.
  3. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers, Central Bank of Cyprus 2011-3, Central Bank of Cyprus.
  4. 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.
  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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