The precautionary demand for money: A rigorous foundation |
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Authors: | Yakir Plessner Joseph D Reid |
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Institution: | Hebrew University, Jerusalem, Israel;Virginia Polytechnic Institute and State University, Blacksburg, VA 24061, USA |
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Abstract: | Consumers' demand for money to hold is shown rigorously to be related to possible but uncertain purchase opportunities rather than to total consumption (income) or to the variability of bond yields. A formal model of consumers' demand for precautionary balances is analyzed. It implies that cash balances demanded will be changed by different amounts in response to equivalent changes in the rates of time preference and inflation. This perhaps explains recent instability in money demand estimates. |
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