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Precautionary Money Demand in a Cash-in-Advance Economy with Capital

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  • Jana Hromcová

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Abstract

We use a stochastic cash-in-advance model with capital to analyze the behavior of economic agents with respect to a precautionary money demand. We show that the conditions under which agents demand more money than they actually spend in the shopping session differ according to the agent’s utility function parameter. When agents are highly risk averse, the precautionary money demand may arise under low technology shocks. The circumstances under which a nonbinding cash-in-advance constraint may appear are reversed in a model without capital. The reason of observed differences is the possibility of converting a fraction of output into capital, not only into real balances. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Jana Hromcová, 2005. "Precautionary Money Demand in a Cash-in-Advance Economy with Capital," Computational Economics, Springer;Society for Computational Economics, vol. 26(1), pages 51-63, August.
  • Handle: RePEc:kap:compec:v:26:y:2005:i:1:p:51-63
    DOI: 10.1007/s10614-005-7315-0
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    References listed on IDEAS

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    1. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-384, April.
    2. Hromcova, Jana, 1998. "A note on income velocity of money in a cash-in-advance economy with capital," Economics Letters, Elsevier, vol. 60(1), pages 91-96, July.
    3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    4. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
    5. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
    6. Cooley, Thomas F, 1997. "Calibrated Models," Oxford Review of Economic Policy, Oxford University Press, vol. 13(3), pages 55-69, Autumn.
    7. Jana Hromcová, 2004. "On The Income Velocity Of Money In A Cash-In-Advance Economy With Capital," Working Papers. Serie AD 2004-21, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    8. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
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