Market intelligence gathering, asymmetric information, and the instability of money demand

Abstract

AbstractThe observed money demand in the U.S. had a stable negative relation with the interest rate up until the 1990s. After this period, this relation fell apart and has never been restored. We show that the central bank's ability to gather information, referred to as market intelligence (MI), matters to generate an upward‐sloping money demand curve. We calibrate the model to the U.S. data for the period from 1990 to 2019 and show that MI helps to match the money demand. We also show that it is beneficial for the society, since it mitigates the inefficiency associated with asymmetric information.