An actuarial approach to short-run monetary equilibrium

Fernando Mierzejewski ()

MPRA Paper from University Library of Munich, Germany

Abstract: The extent to which the money supply affects the aggregate cash balance demanded at a certain level of nominal income and interest rates is determined by the interest-rate-elasticity and stability of the money demand. An actuarial approach is adopted in this paper for dealing with investors facing liquidity constraints and maintaining different expectations about risks. Under such circumstances, a level of surplus exists which maximises expected value. Moreover, when the distorted probability principle is introduced, the optimal liquidity demand is expressed as a Value-at-Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the more unstable the economy, the greater the interestrate-elasticity of the money demand. Moreover, for different parametric characterisation of risks, market parameters are expressed as the weighted average of sectorial or individual estimations, in such a way that multiple equilibria of the economy are possible.

Keywords: money demand; monetary policy; economic capital; distorted risk principle; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: E41 E44 E52 G15 G18 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/9826/1/MPRA_paper_9826.pdf revised version (application/pdf)

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