IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/6688.html
   My bibliography  Save this paper

The Money Demand with Random Output and Limited Access to Debt

Author

Listed:
  • Mierzejewski, Fernando

Abstract

The money-demand of the economy is characterised, when national output is random and investors cannot attract any level of debt at any moment without incurring in additional costs. The optimal cash balance is then expressed as the probability-quantile (or Value-at-Risk) of the series of capital returns on income, and in this way, it is explicitly determined by risk. As a consequence, the interest-rate-elasticity depends on the kind of risks and expectations, in such a way that the more unstable the economy, the greater the interest-rate-elasticity of the money-demand. Therefore, the effectiveness of monetary policy is increased by diminishing the variability of output. Moreover, since flows of capital can affect the riskiness of financial securities by modifying the amounts involved in transactions, part of the adjustment to reestablish the short-run monetary equilibrium can be performed through volatility shocks. Finally, for different parametrisations of risks, aggregated parameters are expressed as the weighted average of sectorial estimations, so that multiple equilibria of the economy are allowed.

Suggested Citation

  • Mierzejewski, Fernando, 2007. "The Money Demand with Random Output and Limited Access to Debt," MPRA Paper 6688, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6688
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/6688/1/MPRA_paper_6688.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119-119.
    2. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    3. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
    4. Franco Modigliani, 1977. "The monetarist controversy; or, should we forsake stabilization policies?," Economic Review, Federal Reserve Bank of San Francisco, issue Spr suppl, pages 27-46.
    5. Duca, John V, 2000. "Financial Technology Shocks and the Case of the Missing M2," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 820-839, November.
    6. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
    7. Robert C. Merton, 1997. "A Model of Contract Guarantees for Credit-Sensitive, Opaque Financial Intermediaries," Review of Finance, European Finance Association, vol. 1(1), pages 1-13.
    8. Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: theory," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 3-33, August.
    9. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    10. Jan Dhaene & Mark Goovaerts & Rob Kaas, 2003. "Economic Capital Allocation Derived from Risk Measures," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(2), pages 44-56.
    11. Wang, Shaun S. & Young, Virginia R. & Panjer, Harry H., 1997. "Axiomatic characterization of insurance prices," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 173-183, November.
    12. Choi, Woon Gyu & Oh, Seonghwan, 2003. "A Money Demand Function with Output Uncertainty, Monetary Uncertainty, and Financial Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 685-709, October.
    13. Marc Goovaerts & Eddy Van den Borre & Roger Laeven, 2005. "Managing Economic and Virtual Economic Capital Within Financial Conglomerates," North American Actuarial Journal, Taylor & Francis Journals, vol. 9(3), pages 77-89.
    14. Shaun, Wang, 1995. "Insurance pricing and increased limits ratemaking by proportional hazards transforms," Insurance: Mathematics and Economics, Elsevier, vol. 17(1), pages 43-54, August.
    15. Pedro Teles & Ruilin Zhou, 2005. "A stable money demand: Looking for the right monetary aggregate," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 29(Q I), pages 50-63.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mierzejewski, Fernando, 2008. "The optimal liquidity principle with restricted borrowing," MPRA Paper 12549, University Library of Munich, Germany.
    2. Mierzejewski, Fernando, 2006. "Liquidity preference as rational behaviour under uncertainty," MPRA Paper 2771, University Library of Munich, Germany.
    3. Mierzejewski, Fernando, 2007. "An actuarial approach to short-run monetary equilibrium," MPRA Paper 2424, University Library of Munich, Germany.
    4. Mierzejewski, Fernando, 2007. "The Short-Run Monetary Equilibrium with Liquidity Constraints," MPRA Paper 6526, University Library of Munich, Germany.
    5. Mierzejewski, Fernando, 2008. "The cost of capital in markets with opaque intermediaries and the risk-structure of interest rates," MPRA Paper 9827, University Library of Munich, Germany.
    6. Mierzejewski, Fernando, 2008. "The Allocation of Economic Capital in Opaque Financial Conglomerates," MPRA Paper 9432, University Library of Munich, Germany.
    7. Fernando MIERZEJEWSKI & Katholieke Universiteit, 2009. "Towards A General Theory Of Liquidity Preference," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 4(2(8)_ Sum).
    8. Mierzejewski, Fernando, 2006. "Economic capital allocation under liquidity constraints," MPRA Paper 2414, University Library of Munich, Germany.
    9. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    10. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
    11. Anderson, Richard G. & Bordo, Michael & Duca, John V., 2017. "Money and velocity during financial crises: From the great depression to the great recession," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 32-49.
    12. Elena Sinelnikova-Muryleva, 2011. "Innovations in the sphere of payments and the money demand in Russia," Research Paper Series, Gaidar Institute for Economic Policy, issue 157P.
    13. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    14. Bozhechkova Alexandra & Trunin Pavel & Sinelnikova-Muryleva Elena & Petrova Diana & Chentsov Alexander, 2018. "Building of monetary and currency markets models," Research Paper Series, Gaidar Institute for Economic Policy, issue 175P, pages 1-96.
    15. Gilles Boevi Koumou & Georges Dionne, 2022. "Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation," Risks, MDPI, vol. 10(11), pages 1-19, October.
    16. Stern Liliana V & Stern Michael L., 2008. "Expected Equity Returns and the Demand for Money," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-29, June.
    17. Ball, Laurence, 2012. "Short-run money demand," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 622-633.
    18. Chi, Yichun & Tan, Ken Seng, 2013. "Optimal reinsurance with general premium principles," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 180-189.
    19. Andreas Tsanakas & Evangelia Desli, 2005. "Measurement and Pricing of Risk in Insurance Markets," Risk Analysis, John Wiley & Sons, vol. 25(6), pages 1653-1668, December.
    20. Laeven, Roger J. A. & Goovaerts, Marc J., 2004. "An optimization approach to the dynamic allocation of economic capital," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 299-319, October.

    More about this item

    Keywords

    Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:6688. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.