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Forward-Looking, Stochastic Cash Management and the Demand for Money

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  • Gregor W. Smith

Abstract

This paper aims to connect money demand theory with optimal inventory theory and with time series evidence. An agent's problem of minimizing cash-management costs is of a familiar threshold form. Closed-form expressions are derived in a special case. The theory implies that expected future interest rates may influence money holdings despite the absence of strictly convex adjustment cots. A distributed-lag expression for these holdings is proposed in which the adjustment and expectations dynamics are derived from theory.

Suggested Citation

  • Gregor W. Smith, 1986. "Forward-Looking, Stochastic Cash Management and the Demand for Money," Working Paper 673, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:673
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