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On Transactions and Precautionary Demand for Money

Author

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  • Jacob A. Frenkel
  • Boyan Jovanovic
Abstract
This paper develops a stochastic framework for determining transactions and precautionary demand for money. Through application of the principles of inventory management, the analysis integrates and extends the work of Baumol, Tobin, and Miller and Orr. Optimal money holdings are shown to depend on the rate of interest, on the mean and the variance of net disbursements and on the cost of portfolio adjustment. The properties of the distribution of the payment period are analyzed. The optimal solution is obtained by minimizing net present value of cost. This solution is compared with the one obtained by the conventional method of minimizing the steady-state cost.

Suggested Citation

  • Jacob A. Frenkel & Boyan Jovanovic, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(1), pages 25-43.
    • Handle: RePEc:oup:qjecon:v:95:y:1980:i:1:p:25-43.
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    References listed on IDEAS

    as
    1. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-534, June.
    2. Karni, Edi, 1973. "The Transactions Demand for Cash: Incorporation of the Value of Time into the Inventory Approach," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1216-1225, Sept.-Oct.
    3. Tsiang, S C, 1969. "The Precautionary Demand for Money: An Inventory Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 77(1), pages 99-117, Jan./Feb..
    4. Olivera, Julio H G, 1969. "A Note on the Optimal Rate of Growth of International Reserves," Journal of Political Economy, University of Chicago Press, vol. 77(2), pages 245-248, March/Apr.
    5. G. C. Archibald & J. Richmond, 1971. "On the Theory of Foreign Exchange Reserve Requirements," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 245-263.
    6. John Makin, 1974. "Exchange rate flexibility and the demand for international reserves," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 110(2), pages 229-243, June.
    7. Barro, Robert J, 1970. "Inflation, the Payments Period, and the Demand for Money," Journal of Political Economy, University of Chicago Press, vol. 78(6), pages 1228-1263, Nov.-Dec..
    8. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    9. Frenkel, Jacob A., 1978. "Pegged exchange rates and managed float," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 9(1), pages 111-140, January.
    10. Edward L. Whalen, 1966. "A Rationalization of the Precautionary Demand for Cash," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(2), pages 314-324.
    11. Brunner, Karl & Meltzer, Allan H., 1978. "Public policies in open economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 9(1), pages 1-4, January.
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