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Precautionary Balances and the Velocity of Circulation of Money

Miquel Faig and Belén Jerez ()

Working Papers from University of Toronto, Department of Economics

Abstract: The low velocity of circulation of money implies that households hold more money than they normally spend. This behavior is explained if households face uncertain expenditure needs, so that they have a precautionary motive for holding money. We investigate this motive in a search model where households are subject to preference shocks. The model predicts that the velocity is not only low but also interest elastic. The model closely fits United States data on velocity and interest rates (1892-2004). The empirical analysis reveals a dramatic reduction in precautionary balances towards the end of our sample, which is important for policy issues.

Keywords: Precautionary Balances; Monetary Search; Velocity of Circulation of Money; Money Demand. (search for similar items in EconPapers)
JEL-codes: E41 E52 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006-03-31
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Precautionary Balances and the Velocity of Circulation of Money (2007)
Journal Article: Precautionary Balances and the Velocity of Circulation of Money (2007) Downloads
Working Paper: Precautionary Balances and the Velocity of Circulation of Money (2006) Downloads
Working Paper: Precautionary balances and the velocity of circulation of money (2005) Downloads
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