Precautionary versus Transactions Motive: The Effects of Aggregate Fluctuations in a Monetary Economy
AbstractModels where money arises due to a transactions motive imply that an increase in aggregate activity will raise the demand for money. Models where money arises due to money being the most preferred form of precautionary savings imply that a decrease in individual uncertainty will lower the demand for money. Therefore, the effect of an aggregate shock on the demand for money depends upon shockâ€™s impact on both aggregate activity and individual uncertainty. This paper addresses these two possibly contradictory effects of aggregate shocks on the demand for money. The model used is a variant of the Lagos-Wright (2003) model of money, where moneyâ€™s use is derived from the underlying frictions in the economy. The Lagos-Wright model is a tractable model by the presence of a general good that does not allow for a precautionary motive for holding money. The model of this paper modifies Lagos-Wright by introducing a set of constrained agents who cannot produce the general good, but still face individual shocks, so they have a precautionary motive for holding money. The model is solved by slowly increasing the measure of agents who are thus constrained from an initial measure of zero to see the effects that increasing the relative importance of the precautionary motive for money has on the aggregate economy. Current results are pending.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 828.
Date of creation: 2004
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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money; precautionary savings; transactions motive; aggregate uncertainty;
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
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