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Information Cycles and Depression in a Stochastic Money-in-Utility Model

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  • Horii, Ryo
  • Ono, Yoshiyasu

Abstract

This paper presents a simple model in which the learning behavior of agents generates fluctuations in money demand and possibly causes a prolonged depression. We consider a stochastic Money-in-Utility model, where agents receive utility from holding money only when a liquidity shock (e.g., a bank run) occurs. Households update the subjective probability of the shock based on the observation and change their money demand accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of low output. We show that the adverse effects of the shocks are largest when they occur in succession in an economy which has enjoyed a long period of stability.

Suggested Citation

  • Horii, Ryo & Ono, Yoshiyasu, 2009. "Information Cycles and Depression in a Stochastic Money-in-Utility Model," MPRA Paper 13485, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13485
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian Learning; Money Demand; Hamilton-Jacobi-Bellman Equations; Markov Modulated Poisson Processes; Partial Delay Differential Equations;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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