IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/2424.html
   My bibliography  Save this paper

An actuarial approach to short-run monetary equilibrium

Author

Listed:
  • Mierzejewski, Fernando

Abstract

The extent to which the money supply affects the aggregate cash balance demanded at a certain level of nominal income and interest rates is determined by the interest-rate-elasticity and stability of the money demand. An actuarial approach is adopted in this paper for dealing with investors facing liquidity constraints and maintaining different expectations about risks. Under such circumstances, a level of surplus exists which maximises expected value. Moreover, when the distorted probability principle is introduced, the optimal liquidity demand is expressed as a Value-at-Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the more unstable the economy, the greater the interestrate-elasticity of the money demand. Moreover, for different parametric characterisation of risks, market parameters are expressed as the weighted average of sectorial or individual estimations, in such a way that multiple equilibria of the economy are possible.

Suggested Citation

  • Mierzejewski, Fernando, 2007. "An actuarial approach to short-run monetary equilibrium," MPRA Paper 2424, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:2424
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/2424/1/MPRA_paper_2424.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/9826/1/MPRA_paper_9826.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert E. Lucas, 2001. "Inflation and Welfare," International Economic Association Series, in: Axel Leijonhufvud (ed.), Monetary Theory as a Basis for Monetary Policy, chapter 4, pages 96-142, Palgrave Macmillan.
    2. Mierzejewski, Fernando, 2006. "Economic capital allocation under liquidity constraints," MPRA Paper 2414, University Library of Munich, Germany.
    3. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
    4. Franco Modigliani, 1977. "The monetarist controversy; or, should we forsake stabilization policies?," Economic Review, Federal Reserve Bank of San Francisco, issue Spr suppl, pages 27-46.
    5. Ball, Laurence, 2012. "Short-run money demand," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 622-633.
    6. Duca, John V, 2000. "Financial Technology Shocks and the Case of the Missing M2," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 820-839, November.
    7. Baum, Christopher F. & Caglayan, Mustafa & Ozkan, Neslihan & Talavera, Oleksandr, 2006. "The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity," Review of Financial Economics, Elsevier, vol. 15(4), pages 289-304.
    8. Lemke, Wolfgang & Greiber, Claus, 2005. "Money demand and macroeconomic uncertainty," Discussion Paper Series 1: Economic Studies 2005,26, Deutsche Bundesbank.
    9. Sean Collins & Cheryl L. Edwards, 1994. "An alternative monetary aggregate: M2 plus household holdings of bond and equity mutual funds," Proceedings, Federal Reserve Bank of St. Louis, issue Nov, pages 7-29.
    10. Robert C. Merton, 1997. "A Model of Contract Guarantees for Credit-Sensitive, Opaque Financial Intermediaries," Review of Finance, European Finance Association, vol. 1(1), pages 1-13.
    11. Joseph Atta-Mensah, 2004. "Money Demand and Economic Uncertainty," Staff Working Papers 04-25, Bank of Canada.
    12. Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: theory," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 3-33, August.
    13. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    14. Jan Dhaene & Mark Goovaerts & Rob Kaas, 2003. "Economic Capital Allocation Derived from Risk Measures," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(2), pages 44-56.
    15. Choi, Woon Gyu & Oh, Seonghwan, 2003. "A Money Demand Function with Output Uncertainty, Monetary Uncertainty, and Financial Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 685-709, October.
    16. Marc Goovaerts & Eddy Van den Borre & Roger Laeven, 2005. "Managing Economic and Virtual Economic Capital Within Financial Conglomerates," North American Actuarial Journal, Taylor & Francis Journals, vol. 9(3), pages 77-89.
    17. Christian Dreger & Jürgen Wolters, 2006. "Investigating M3 Money Demand in the Euro Area: New Evidence Based on Standard Models," Discussion Papers of DIW Berlin 561, DIW Berlin, German Institute for Economic Research.
    18. Pedro Teles & Ruilin Zhou, 2005. "A stable money demand: Looking for the right monetary aggregate," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q I), pages 50-63.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mierzejewski, Fernando, 2008. "The optimal liquidity principle with restricted borrowing," MPRA Paper 12549, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mierzejewski, Fernando, 2006. "Liquidity preference as rational behaviour under uncertainty," MPRA Paper 2771, University Library of Munich, Germany.
    2. Mierzejewski, Fernando, 2007. "The Money Demand with Random Output and Limited Access to Debt," MPRA Paper 6688, University Library of Munich, Germany.
    3. Mierzejewski, Fernando, 2008. "The optimal liquidity principle with restricted borrowing," MPRA Paper 12549, University Library of Munich, Germany.
    4. Fernando MIERZEJEWSKI & Katholieke Universiteit, 2009. "Towards A General Theory Of Liquidity Preference," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 4(2(8)_ Sum).
    5. Ingrid Groessl & Artur Tarassow, 2015. "A Microfounded Model of Money Demand Under Uncertainty, and some Empirical Evidence," Macroeconomics and Finance Series 201504, University of Hamburg, Department of Socioeconomics, revised Jan 2018.
    6. Mierzejewski, Fernando, 2008. "The cost of capital in markets with opaque intermediaries and the risk-structure of interest rates," MPRA Paper 9827, University Library of Munich, Germany.
    7. Mierzejewski, Fernando, 2008. "The Allocation of Economic Capital in Opaque Financial Conglomerates," MPRA Paper 9432, University Library of Munich, Germany.
    8. Mierzejewski, Fernando, 2007. "The Short-Run Monetary Equilibrium with Liquidity Constraints," MPRA Paper 6526, University Library of Munich, Germany.
    9. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    10. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
    11. Anderson, Richard G. & Bordo, Michael & Duca, John V., 2017. "Money and velocity during financial crises: From the great depression to the great recession," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 32-49.
    12. Roberto Santis, 2015. "Quantity theory is alive: the role of international portfolio shifts," Empirical Economics, Springer, vol. 49(4), pages 1401-1430, December.
    13. Donald H. Dutkowsky & Barry Z. Cynamon & Barry E. Jones, 2006. "U.S. Narrow Money for the Twenty-First Century," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 142-152, January.
    14. Mr. David Cook & Woon Gyu Choi, 2007. "Financial Market Risk and U.S. Money Demand," IMF Working Papers 2007/089, International Monetary Fund.
    15. Pedro Teles & Harald Uhlig & João Valle e Azevedo, 2016. "Is Quantity Theory Still Alive?," Economic Journal, Royal Economic Society, vol. 126(591), pages 442-464, March.
    16. Bozhechkova Alexandra & Trunin Pavel & Sinelnikova-Muryleva Elena & Petrova Diana & Chentsov Alexander, 2018. "Building of monetary and currency markets models," Research Paper Series, Gaidar Institute for Economic Policy, issue 175P, pages 1-96.
    17. K. Azim Özdemir & Mesut Saygılı, 2013. "Economic uncertainty and money demand stability in Turkey," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(3), pages 314-333, July.
    18. Helmut Herwartz & Jordi Sardà & Bernd Theilen, 2016. "Money demand and the shadow economy: empirical evidence from OECD countries," Empirical Economics, Springer, vol. 50(4), pages 1627-1645, June.
    19. Sosunov, K., 2013. "Estimation of the Money Demand Function in Russia," Journal of the New Economic Association, New Economic Association, vol. 18(2), pages 89-99.
    20. Columba, Francesco, 2009. "Narrow money and transaction technology: New disaggregated evidence," Journal of Economics and Business, Elsevier, vol. 61(4), pages 312-325, July.

    More about this item

    Keywords

    money demand; monetary policy; economic capital; distorted risk principle; Value-at-Risk;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:2424. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.