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Precautionary demand for money in a monetary business cycle model

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  • Telyukova, Irina A.
  • Visschers, Ludo

Abstract

We investigate quantitative implications of precautionary demand for money 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 and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.

Suggested Citation

  • Telyukova, Irina A. & Visschers, Ludo, 2011. "Precautionary demand for money in a monetary business cycle model," UC3M Working papers. Economics we1142, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we1142
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    Cited by:

    1. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers 2009-031, Federal Reserve Bank of St. Louis.
    2. Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    3. Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2015. "Financial Innovations, Money Demand, and the Welfare Cost of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 223-261, June.
    4. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
    5. Tamas Briglevics & Scott Schuh, 2013. "U.S. consumer demand for cash in the era of low interest rates and electronic payments," Working Papers 13-23, Federal Reserve Bank of Boston.
    6. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    7. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1148-1177.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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