The Short-Run Monetary Equilibrium with Liquidity Constraints
AbstractA theoretical framework is presented to characterise the money demand in deregulated markets. The main departure from the perfect capital markets setting is that, instead of assuming that investors can lend and borrow any amount of capital at a single (and exogenously determined) interest rate, a bounded money supply is considered. The problem of capital allocation can then be formulated in actuarial terms, in such a way that the optimal liquidity demand can be expressed as a Value-at-Risk. Within this framework, the monetary equilibrium determines the rate at which a unit of capital is exchange by a unit of risk, or, in other words, it determines the market price of risk. In a Gaussian setting, such a price is expressed as a mean-to-volatility ratio and can then be regarded as an alternative measure to the Sharpe ratio. Finally, since the model depends on observable variables, it can be verified on the grounds of historical data. The Black Monday (October 1987) and the Dot-Com Bubble (April 2000) episodes can be described (if not explained) on this base.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6526.
Date of creation: 31 Dec 2007
Date of revision:
Money demand; Monetary equilibrium; Economic capital; Distorted- probability principle; Value-at-Risk;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-MAC-2008-01-05 (Macroeconomics)
- NEP-MON-2008-01-05 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Franco Modigliani, 1977.
"The monetarist controversy; or, should we forsake stabilization policies?,"
Economic Review, Federal Reserve Bank of San Francisco,
Federal Reserve Bank of San Francisco, issue Spr suppl, pages 27-46.
- Modigliani, Franco, 1977. "The Monetarist Controversy or, Should We Forsake Stabilization Policies?," American Economic Review, American Economic Association, American Economic Association, vol. 67(2), pages 1-19, March.
- Miller, Merton H, 1988.
"The Modigliani-Miller Propositions after Thirty Years,"
Journal of Economic Perspectives, American Economic Association,
American Economic Association, vol. 2(4), pages 99-120, Fall.
- Merton H. Miller, 1989. "The Modigliani-Miller Propositions After Thirty Years," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 2(1), pages 6-18.
- 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.
- William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 39, pages 119.
- Shaun, Wang, 1995. "Insurance pricing and increased limits ratemaking by proportional hazards transforms," Insurance: Mathematics and Economics, Elsevier, vol. 17(1), pages 43-54, August.
- Wang, Shaun S. & Young, Virginia R. & Panjer, Harry H., 1997. "Axiomatic characterization of insurance prices," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 173-183, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.