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Precautionary Demand for Money in a Monetary Business Cycle Model

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  • Telyukova, Irina A.
  • Visschers, Ludo

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 University Library of Munich, Germany in its series MPRA Paper with number 15622.

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Date of creation: 08 Jun 2009
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Handle: RePEc:pra:mprapa:15622

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Keywords: Precautionary Demand for Money; Business Cycles;

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  1. Miquel Faig & Belén Jerez, 2005. "Precautionary Balances And The Velocity Of Circulation Of Money," Economics Working Papers we051406, Universidad Carlos III, Departamento de Economía.
  2. Irina A. Telyukova & Randall Wright, 2006. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," 2006 Meeting Papers 45, Society for Economic Dynamics.
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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. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2014. "Financial innovations, money demand, and the welfare cost of inflation," ECON - Working Papers 136, Department of Economics - University of Zurich.
  3. 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.
  4. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers 2011-3, Central Bank of Cyprus.
  5. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers 2009-031, Federal Reserve Bank of St. Louis.

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