Transactions Demand for Money with a Stochastic, Time-Varying Interest Rate

Gregor Smith

The Review of Economic Studies, 1989, vol. 56, issue 4, 623-633

Abstract: This paper considers a stochastic, time-varying interest rate in a continuous-time inventory-theoretic model of the demand for money. The problem of minimizing expected, discounted cash-management costs is ascribed to an agent. An optimal cash-management policy exists and is of a familiar target-threshold form. Closed-form expressions for the forward-looking, time-varying targets and thresholds are derived in special cases and implications for the dynamics of the cash balance are described.

Date: 1989
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:56:y:1989:i:4:p:623-633.

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