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Precautionary money balances with aggregate uncertainty


  • Wilbur John Coleman


This paper studies the dependence of velocity on stochastic monetary growth in a model where households demand money for both its transactions and precautionary services. The setup consists of a cash-in-advance economy in which individual uncertainty leads households to value money for its insurance against adverse endowment shocks. With stochastic monetary growth the distribution of money balances across households does not settle down to a time invariant distribution, so one aim of this paper is to model this distribution as an endogenous state variable.

Suggested Citation

  • Wilbur John Coleman, 1991. "Precautionary money balances with aggregate uncertainty," International Finance Discussion Papers 399, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:399

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    References listed on IDEAS

    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. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-732, May.
    3. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-396, March.
    4. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    5. Giovannini, Alberto & Labadie, Pamela, 1991. "Asset Prices and Interest Rates in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1215-1251, December.
    6. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
    7. Duncan K. Foley & Martin F. Hellwig, 1975. "Asset Management with Trading Uncertainty," Review of Economic Studies, Oxford University Press, vol. 42(3), pages 327-346.
    8. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    9. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-880, December.
    10. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
    11. Coleman, Wilbur John, II, 1990. "Solving the Stochastic Growth Model by Policy-Function Iteration," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 27-29, January.
    12. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    13. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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