Re-Examining the Buffer-Stock Model of Money

Abstract

This paper critically examines recent papers in the buffer stock or supply side disequilibrium models of money. The paper first investigates the assumptions at the m icroeconomic level and concludes that even with these assumptions, aggregate behavior does not necessarily follow buffer-stock models in which excess cash balances are held involuntarily. In a simple model with uncertain cash flows, it is shown that in the aggregate short-run involuntary cash holdings are negligible. If the buffer-stock story is applicable, it is to a broader definition of money than used in most empirical work. The second part of the paper examines empirical work and argues that the buffer-stock idea cannot be implemented using single equation techniques, and that when viewed appropriately, current empirical result s refute the buffer-stock idea as it is currently modeled. Copyright 1987 by Royal Economic Society.