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Limited Commitment and the Demand for Money

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  • Aleksander Berentsen

    (University of Basel)

Abstract

Understanding money demand is important for our comprehension of macroeconomics and monetary policy. Its instability has made this a challenge. Common explications for the instability are financial regulations and financial innovations that shift the money demand function. We provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data. Limited commitment can also explain why the ratio of credit to M1 is currently so low, despite that nominal interest rates are at their lowest recorded levels. In a low interest rate environment, incentives to default are high and so credit constraints bind tightly, which depresses credit activities.

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  • Aleksander Berentsen, 2016. "Limited Commitment and the Demand for Money," 2016 Meeting Papers 104, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:104
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    Cited by:

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    5. Samuel Huber & Jaehong Kim & Alessandro Marchesiani, 2019. "Unemployment and the demand for money," ECON - Working Papers 324, Department of Economics - University of Zurich.

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    More about this item

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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