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Precautionary money demand in a business-cycle model
Journal of Monetary Economics (2013)
  • Irina A Telyukova
  • Ludo Visschers
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.
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Irina A Telyukova and Ludo Visschers. "Precautionary money demand in a business-cycle model" Journal of Monetary Economics (2013)
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