[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/ucv/wpaper/2020-03.html
   My bibliography  Save this paper

Precautionary Money Demand in a Cash-in-Advance Model

Author

Listed:
  • Sergio Salas
Abstract
Despite a plethora of studies in monetary economics regarding the study of inflation, interest rates, stock returns, and velocity of money, a model that helps to jointly characterize these interactions is still scarce in the literature. A key missing piece in most of the literature attempting such a characterization is idiosyncratic precautionary money demand, which is prevalent in the data. This paper presents a simple model where precautionary money demand arises due to heterogeneity in households' liquidity needs. In spite of its heterogeneous complexity, aggregation in the model is straightforward, this is one of the main contributions of the paper, and therefore an analysis of the models' implications can be undertaken when households' portfolio is composed of cash, government bonds, and equity. The empirical analysis is conducted separately for the time spans 1984.I-2007.IV and 2008.I-2019.IV. The model can capture important time-series properties that a model without the idiosyncratic feature is unable to achieve. However, the model falls short of providing an adequate match of some moments, especially in the second sub-sample of the analysis.

Suggested Citation

  • Sergio Salas, 2020. "Precautionary Money Demand in a Cash-in-Advance Model," Working Papers 2020-03, Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso.
    • Handle: RePEc:ucv:wpaper:2020-03
    as

    Download full text from publisher

    File URL: http://ene.pucv.cl/wp/2020/wp2020-03.pdf
    File Function: First version, 2020
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-384, April.
    2. Edouard Challe & Julien Matheron & Xavier Ragot & Juan F. Rubio‐Ramirez, 2017. "Precautionary saving and aggregate demand," Quantitative Economics, Econometric Society, vol. 8(2), pages 435-478, July.
    3. Benoit Carmichael, 1989. "Anticipated Monetary Policy in a Cash-in-Advance Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 93-108, February.
    4. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1148-1177.
    5. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
    6. Orazio P. Attanasio & Luigi Guiso & Tullio Jappelli, 2002. "The Demand for Money, Financial Innovation, and the Welfare Cost of Inflation: An Analysis with Household Data," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 317-351, April.
    7. Giovannini, Alberto, 1989. "Uncertainty and liquidity," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 239-258, March.
    8. Benjamin Moll, 2014. "Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?," American Economic Review, American Economic Association, vol. 104(10), pages 3186-3221, October.
    9. Boyle, Glenn W, 1990. "Money Demand and the Stock Market in a General Equilibrium Model with Variable Velocity," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1039-1053, October.
    10. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
    11. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    12. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
    13. Kocherlakota, Narayana R., 1990. "On the 'discount' factor in growth economies," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 43-47, January.
    14. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    15. Telyukova, Irina A. & Visschers, Ludo, 2013. "Precautionary money demand in a business-cycle model," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 900-916.
    16. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    17. Athanasios Geromichalos & Juan M Licari & Jose Suarez-Lledo, 2007. "Monetary Policy and Asset Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 761-779, October.
    18. Giovannini, Alberto & Labadie, Pamela, 1991. "Asset Prices and Interest Rates in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1215-1251, December.
    19. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    20. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
    21. Nobuhiro Kiyotaki & John Moore, 2019. "Liquidity, Business Cycles, and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2926-2966.
    22. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    23. Taub, Bart, 1994. "Currency and Credit Are Equivalent Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 921-956, November.
    24. Evans, Martin D.D. & Hnatkovska, Viktoria, 2012. "A method for solving general equilibrium models with incomplete markets and many financial assets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1909-1930.
    25. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
    26. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    27. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
    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. Blouri, Yashar & Ehrlich, Maximilian V., 2020. "On the optimal design of place-based policies: A structural evaluation of EU regional transfers," Journal of International Economics, Elsevier, vol. 125(C).
    2. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.
    3. Telyukova, Irina A. & Visschers, Ludo, 2013. "Precautionary money demand in a business-cycle model," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 900-916.
    4. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    5. Toda, Alexis Akira, 2019. "Wealth distribution with random discount factors," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 101-113.
    6. Yi Wen, 2009. "When does heterogeneity matter?," Working Papers 2009-024, Federal Reserve Bank of St. Louis.
    7. López, José Joaquín, 2017. "Financial frictions and productivity: Evidence from Mexico," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 294-301.
    8. Sergio Salas, 2017. "Asset prices and wealth inequality in a simple model with idiosyncratic shocks," Estudios de Economia, University of Chile, Department of Economics, vol. 44(1 Year 20), pages 105-119, June.
    9. Tanaka, Ken'ichiro & Toda, Alexis Akira, 2015. "Discretizing Distributions with Exact Moments: Error Estimate and Convergence Analysis," University of California at San Diego, Economics Working Paper Series qt7g23r5kh, Department of Economics, UC San Diego.
    10. Ralph Chami & Thomas F. Cosimano & Connel Fullenkamp, 2001. "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 575-606, July.
    11. Nils M. Gornemann & Keith Kuester & Makoto Nakajima, 2012. "Monetary policy with heterogeneous agents," Working Papers 12-21, Federal Reserve Bank of Philadelphia.
    12. Chien, YiLi & Wen, Yi, 2022. "The determination of public debt under both aggregate and idiosyncratic uncertainty," Journal of Economic Theory, Elsevier, vol. 203(C).
    13. Hugo Rodríguez, 1998. "The variability of money velocity in a generalized cash-in-advance model," Economics Working Papers 320, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Raphael Espinoza & Dimitrios P. Tsomocos, 2019. "Monetary transaction costs and the term premium," Chapters, in: Financial Regulation and Stability, chapter 8, pages 224-244, Edward Elgar Publishing.
    15. Wai-Yip Alex Ho & Chun-Yu Ho, 2016. "Inflation, Financial Developments, and Wealth Distribution," IMF Working Papers 2016/132, International Monetary Fund.
    16. Vogel, Edgar, 2014. "Optimal Level of Government Debt: Matching Wealth Inequality and the Fiscal Sector," MEA discussion paper series 201410, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    17. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    18. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    19. Bingbing Dong, 2014. "Asset Pricing and Monetary Policy," 2014 Meeting Papers 881, Society for Economic Dynamics.
    20. Tomoyuki Nakajima & Shuhei Takahashi, 2020. "On the Non-Existence of a Zero-Tax Steady State with Incomplete Asset Markets," KIER Working Papers 1025, Kyoto University, Institute of Economic Research.

    More about this item

    Keywords

    Precautionary money demand; Portfolio allocation; Heterogeneity; Government bonds; Stock Market; Open market operations;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    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:ucv:wpaper:2020-03. 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: Daniel Goya (email available below). General contact details of provider: https://edirc.repec.org/data/enucvcl.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.