Limited commitment and the demand for money

Aleksander Berentsen, Samuel Huber () and Alessandro Marchesiani ()

No 199, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Understanding money demand is important for our comprehension of macroeconomics and monetary policy. Its instability has made this a challenge. Common explications for the instability are financial regulations and financial innovations that shift the money demand function. We provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data. Limited commitment can also explain why the ratio of credit to Ml is currently so low, despite that nominal interest rates are at their lowest recorded levels. In a low interest rate environment, incentives to default are high and so credit constraints bind tightly, which depresses credit activities.

Keywords: Money demand; financial intermediation; limited commitment (search for similar items in EconPapers)
JEL-codes: D9 E4 E5 (search for similar items in EconPapers)
Date: 2015-07, Revised 2016-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Limited Commitment and the Demand for Money (2018)
Working Paper: Limited Commitment and the Demand for Money (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:199

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