Cash-in-advance, buffer-stock monetarism, and the loanable funds-liquidity preference debate in an open economy

Norman C. Miller

Journal of Macroeconomics, 1992, vol. 14, issue 3, 487-507

Abstract: In a flexible exchange rate open economy, the dynamics of the interest rate within a loanable funds, LF, or an "amended" liquidity preference, LP, model (wherein the latter embodies either "cash-in-advance" or "spillover" considerations) can differ substantially from the dynamics within a traditional LP model. Within the former a debt financed fiscal/investment shock can generate "interest rate overshooting," and thereby create highly volatile asset prices. Also, the LF/amended-LP model provides a new explanation for the change in the short-run response of the interest rate to monetary shocks from negative to positive in the early 1970s; that is, this may have been caused by the switch from fixed to flexible exchange rates.

Date: 1992
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