The Store-of-Value-Function of Money as a Component of Household Risk Management

Ingrid Größl and Ulrich Fritsche

No 660, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We analyse how money as a store of value affects the decisions of a representative household under diversifiable and non-diversifiable risks given that the central bank successfully stabilizes the rate of inflation at a low level. Assuming exponential utility allows us to derive an explicit relationship between optimal money holdings, the household's desire to tilt, smooth and stabilize consumption as well as minimize portfolio risk. In this context we also show how the correlation between stochastic labour income and stock returns impact the store-of-value function of money. Finally we prove that the store-of-value benefits of money holdings continue to hold even if we take riskless alternatives into account.

Keywords: Money demand; consumption; CRRA; CARA; exponential utility; households; risk; risk management (search for similar items in EconPapers)
JEL-codes: D11 E21 E41 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2007
New Economics Papers: this item is included in nep-mac, nep-mon and nep-upt
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Store-of-Value-Function of Money as a Component of Household Risk Management (2006)
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