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Precautionary Demand for Money in a Monetary Business Cycle Model

  • Irina A. Telyukova

    (University of California, San Diego)

  • Ludo Visschers

    (Simon Fraser University)

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.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0906.

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Length: 43 pages
Date of creation: 2009
Date of revision: Jun 2009
Handle: RePEc:eie:wpaper:0906
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