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Precautionary money demand in a business-cycle model

  • Telyukova, Irina A.
  • Visschers, Ludo

Precautionary demand for money is significant in the data, and may have important implications 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. The resulting precautionary motive for holding money produces substantial improvements in accounting for business-cycle behavior of nominal variables, at no cost to real variables.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 8 ()
Pages: 900-916

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Handle: RePEc:eee:moneco:v:60:y:2013:i:8:p:900-916
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