Publication: Precautionary demand for money in a monetary business cycle model
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2011-11
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Abstract
We investigate quantitative implications of precautionary demand for money 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 and find that the resulting precautionary motive for holding money produces substantial qualitative
and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost
to real variables.
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Precautionary demand for money, Business cycle fluctuations, Money velocity fluctuations