Precautionary money demand in a business-cycle model Articles uri icon

publication date

  • November 2013

start page

  • 900

end page

  • 916

issue

  • 8

volume

  • 60

International Standard Serial Number (ISSN)

  • 0304-3932

Electronic International Standard Serial Number (EISSN)

  • 1873-1295

abstract

  • Precautionary demand for money is significant in the data, and may have important implications 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. The resulting precautionary motive for holding money produces substantial improvements in accounting for business-cycle behavior of nominal variables, at no cost to real variables. (C) 2013 Elsevier B.V. All rights reserved.

subjects

  • Economics

keywords

  • precautionary money demand; velocity of money; business cycle; idiosyncratic risk; in-advance economy; card debt puzzle; indivisible labor; cash; equilibrium; policy; variability; inflation; liquidity; framework