The Money Demand with Random Output and Limited Access to Debt

Fernando Mierzejewski ()

MPRA Paper from University Library of Munich, Germany

Abstract: The money-demand of the economy is characterised, when national output is random and investors cannot attract any level of debt at any moment without incurring in additional costs. The optimal cash balance is then expressed as the probability-quantile (or Value-at-Risk) of the series of capital returns on income, and in this way, it is explicitly determined by risk. As a consequence, the interest-rate-elasticity depends on the kind of risks and expectations, in such a way that the more unstable the economy, the greater the interest-rate-elasticity of the money-demand. Therefore, the effectiveness of monetary policy is increased by diminishing the variability of output. Moreover, since flows of capital can affect the riskiness of financial securities by modifying the amounts involved in transactions, part of the adjustment to reestablish the short-run monetary equilibrium can be performed through volatility shocks. Finally, for different parametrisations of risks, aggregated parameters are expressed as the weighted average of sectorial estimations, so that multiple equilibria of the economy are allowed.

Keywords: Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: E41 E44 E52 G11 (search for similar items in EconPapers)
Date: 2007-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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