Money Holdings Research Articles

The instability of some non-full-support steady states in a random matching model of money

Zhu (2003) shows existence of full-support monetary steady states with strictly concave value functions in a random matching model with individual money holdings in {0,1,2,…,B} for a general B. He also shows that corresponding to each such steady state is an l-replica steady state for each l∈N: money is traded in bundles of l units, the support is {0,l,2l,…,lB}, and the value function is a step-function with jumps at points of the support. We show that such l-replicas are unstable if the underlying full-support steady state is a pure strategy steady state and if the support of the initial distribution is not {0,l,2l,…,lB}.

Sunspot Equilibria of Baby-Sitting Cooperatives

Krugman has popularized the experiences of the Capitol Hill Baby-sitting Cooperative (BSC) as a fundamental paradigm for macroeconomic policy. Many authors who have formally analyzed the story have concluded that money must be supplied in an optimal quantity for smooth functioning of the BSC economy. We create a natural model of the BSC which has sunspot equilibria. Agents must co-ordinate their expectations to arrive at an equilibrium. Our analysis shows that many of the lessons derived from the experience of the BSC depend on a particular choice of the equilibrium. Other choices can be more efficient and lead to different lessons. In particular, money holdings act like sunspots; they matter only if all agents agree that they matter. Surprisingly, flexible prices cannot solve the problem of mismatch between supply and demand. Also equilibria with excess supply may be more efficient than outcomes where supply and demand are matched. Our model shows that there are deep lessons to be learned from the BSC economy, but they are of a rather different nature from those derived by most authors. How expectations are formed, and how agents learn about other agents strategies form a crucial part of the equilibrium. These must be part of good models, and suitable interventions must take these into account. How agents can consciously choose among multiple equilibria and learn to coordinate on a particular choice requires more attention from economists.

Currency demand, new technology, and the adoption of electronic money: Micro evidence from Japan

We estimate currency demand functions conditional on electronic money adoption with household-level survey data from Japan under an Instrumental Quantile Regression framework. Contrary to theoretical predictions, our results suggest that users of electronic money hold more currency than non-users.

Inflation, Money Demand and Portfolio Choice

We introduce a money demand motive in a life-cycle portfolio choice model and estimate the structural parameters that can generate limited stock market participation and plausible holdings of money, bonds and stocks. The model predicts an increase in bond holdings over the life cycle, and a declining share of money in portfolios as wealth increases. Both predictions are consistent with the data, even though the model overpredicts (underpredicts) stock (bond) holdings in early life. When mean inflation approaches zero, the share of money in the financial portfolio rises at the expense of both bond and stockholdings, generating simultaneously a lower stock market participation rate.

MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY

The limited asset-market participation hypothesis has triggered a debate on DSGE models' determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate in the market for interest-bearing securities hold money. In this case, endogenous monetary transfers between the two groups make it possible to smooth consumption differences, and the model is determinate, provided that the non-negativity constraint on individual money holdings is satisfied.

Instability of Money Demand: Recent Evidence for Thailand

This study examines the short-run and long-run stability properties of money demand in Thailand using the monetary aggregates M1, M2 and M3, for the period from 1993Q1 to 2012Q4. We use the dynamic OLS specification of Stock and Watson (1993) and Ball (2001), and the estimation technique of the Johansen cointegration test to determine the stability of money demand. The results from the Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand and real GDP (a proxy for real income) and interest rate. In the short run, only a change in real GDP affects M1 money holdings. In the long-run both real GDP and an interest rate determine money demand. The short-run instability of M1 money demand makes it difficult for the monetary authorities to use M1 as an intermediate target to control intermediate-run and long-run inflation.

Money and price posting under private information

We study price posting with undirected search in a search-theoretic monetary model with divisible money and divisible goods. Ex ante homogeneous buyers experience match-specific preference shocks in bilateral trades. The shocks follow a continuous uniform distribution, and the realizations of the shocks are private information. We show that there exists a unique monetary equilibrium for generic values of the inflation rate. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers may spend nothing, a fraction or all of their money holdings, depending on their preference-shock realizations. Inflation reduces the extent of non-linear pricing. The model captures the hot-potato effect of inflation along both the extensive margin, as an increase in the trading probability, and the intensive margin, as higher fractions of money being spent.

The interaction between money and asset markets: A spillover index approach

We employ Diebold and Yilmaz’s (2009, 2012) spillover approach to study the relationship between US money and financial assets since 2000. We find that sizeable spillovers arise during periods of economic and financial turbulence (after the 11 September 2001 terrorist attacks, the post-Lehman Brothers bankruptcy period, and in the second half of 2011 when there were concerns about sovereign market developments). Households readjusting their portfolios between holdings of risky financial assets and nominal-certain money may have been the dominant factor at play in explaining this. The interaction of the monetary base with the financial assets in recent years is less than that of M2 with them, a perhaps surprising feature given the balance sheet policies pursued by the Federal Reserve during this time.

A monetary theory with non-degenerate distributions

Abstract We construct and analyze a tractable search model of money with a non-degenerate distribution of money holdings. Analytical tractability comes from modeling decentralized exchange as directed search, which makes the monetary steady state block recursive. By adapting lattice-theoretic techniques, we characterize individualsʼ policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists and provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate. Moreover, we analyze the properties of this distribution.

Convergence, capital accumulation and the nominal exchange rate

This paper develops a flexible price, two-sector growth model with a nominal side to study the role of the exchange rate in transition dynamics. We adopt a standard small open economy model with traded and nontraded goods, where the engines of growth are exogenous productivity improvements and capital accumulation. We enhance this standard framework by adding a preference for real money holdings, captured by money-in-the-utility. We follow Schmitt-Grohé and Uribe (2003) and assume that the interest rate on bonds issued by the small open economy is debt-dependent, and interpret it as a simple financial friction. We show analytically that the choice of the exchange rate regime influences the transition dynamics of a small open economy through the balance sheet of the central bank. We then calibrate the model to explore the quantitative significance of our results. We find that the choice of the exchange rate regime has significant and lasting effects on prices, consumption, investment and sectoral allocations, and the composition of financial assets.

Modelling money demand: further evidence from an international comparison

This article aims at estimating money demand for the euro area, the United States and the United Kingdom using a Dynamic Ordinary Least Squares (DOLS) estimator. Our findings show that (1) wealth effects on money demand are important in the euro area and the United Kingdom; (2) the impact of changes in the interest rate on real money holdings is negative and small; (3) goods are a reasonable alternative to money and (4) international currency substitution has a major influence on the behaviour of real money demand in the United Kingdom.

Money demand in the euro area, the US and the UK: Assessing the role of nonlinearity

This paper estimates money demand equations for the euro area, the US and the UK using a quantile regression framework and a smooth-transition regression. The quantile regression technique highlights that: (i) the income and the interest rate semi-elasticities are significantly different from the OLS estimates at the tails of the distribution of real money holdings; and (ii) the sensitivity of money demand with respect to inflation tends to be larger when real money holdings are extremely low. Finally, the smooth transition model provides two interesting findings. On the one hand, they capture reasonably well the nonlinear dynamics associated with the money demand function. On the other hand, they show that the elasticity of money demand with respect to inflation rate, interest rate, GDP and exchange rate varies not only in accordance with the regime considered, but also across the countries under consideration.

Exchange Rate and Current Account Dynamics with Habits over Consumption and Money Holdings

Incorporating two independent habits over consumption and money holdings into a small country model, we examine the adjustment dynamics of the current account and the exchange rate to expansionary monetary and fiscal shocks under two alternative policy regimes: (1) the endogenous income transfer regime; and (2) the endogenous fiscal spending regime. In response to the shocks under regime (1), the exchange rate depreciates on impact and in the long run whereas it appreciates (depreciates) in transition if preferences for real money balances exhibit distant (adjacent) complementarity. Under regime (2), the consumption habits and the monetary habits jointly generate possibly non-monotonic current account dynamics. An induced increase in fiscal spending in regime (2) can generate a current account surplus in the case where the monetary habits exhibit strong distant complementarity.

Money Targeting, Heterogeneous Agents and Dynamic Instability

Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption di¤erences and the model is determinate provided that the nonnegativity constraint on individual money holdings is satis ed.

Cash-in-Advance Constraint with Status in a Neoclassical Growth Model

In this paper, we assume that a cash-in-advance (CIA) constraint itself depends on relative income, which implies the status. This constraint means that agents with higher income are more creditworthy and can make purchases with fewer money holdings. Under this assumption, we construct a one-sector neoclassical growth model and show that there exists a unique steady state that has saddle-path stability without specifying each function. Furthermore, we examine the effects of money growth on capital accumulation. If the status elasticity of CIA constraint is large, the Tobin effect can arise. In contrast, if it is small, the anti-Tobin effect can arise.

SCALE ECONOMIES AND HETEROGENEITY IN BUSINESS MONEY DEMAND: THE ITALIAN EXPERIENCE

This paper investigates the demand for money by firms and the existence of economies of scale in the Italian manufacturing industry. We estimate a model for cash elaborated by Fujiki and Mulligan using a different estimation procedure from the previous literature. We then introduce an iterative procedure based on backward exclusion of firms from model estimation which points out the high heterogeneity of Italian companies in money demand. Our estimates show that the Italian manufacturing industry, considered as a whole, does not enjoy scale economies in money demand. However, our iterative procedure points out that the cause of this result has to be ascribed to small firms which are characterized by thin cash money holdings and a consequent very modest opportunity cost.

Broad Money Demand in Mauritius with Implications for Monetary Policy

This paper employs ECM approach to investigate the long run and short-run components of the broad money demand function in Mauritius for the period spanning from 2000 to 2009. To the author’s best knowledge, no study has been undertaken over broad money in Mauritius since 1992, with an update being long overdue. Results show that M2 is positively elastic with respect to GDP, with the elasticity coefficient revolving around 2.80%, clearly showing that Mauritius is not endowed with a fully developed financial system with monetization moving faster than output. The low adjustment coefficient for VECM furthers substantiates the fact that there is indeed a lack of alternative assets to M2 and above all fully justifies the transition from monetary targeting to interest rate targeting. Evidence is found in favor of foreign asset substitution but only through the exchange rate channel. Findings further show that the local stock market does not act as a substitute to local money holdings. Overall, the study points out a rather stable demand for money function in Mauritius so that the monetary authority can contemplate using it as a complementary tool but chiefly for long-run policy assessments.

Household money demand: The euro area case

SummaryIn this paper we analyse household holdings of the broad monetary aggregate M3 in the euro area from 1991 until 2010. We develop a nominal model with satisfactory economic and statistical properties. The main determinants are a transactions variable, wealth considerations, opportunity costs and uncertainty. The model is robust to different samples considered and a multitude of mis-specification tests. The exercise also provides insights that go beyond the portfolio allocation decision of households. According to our analysis, it is quite apparent that in equilibrium, households jointly determine consumption and broad money holdings both influenced by wealth as well as interest rates.

Intermediary cost and coexistence puzzle

The coexistence puzzle is explained via an interaction between intermediary cost and uncertainty with regards to consumption trade. If a trade opportunity as a buyer is more likely to arise, ex-ante net return on bond at the margin would be negative up to a certain amount of transactions and, therefore, agents are willing to hold money in the presence of an interest-bearing bond.

WEALTH, ASSET PORTFOLIO, MONEY DEMAND AND POLICY RULE

ABSTRACTI look at the linkages between monetary policy and asset wealth using quarterly data for the USA. I show that a positive interest rate shock leads to a fall in aggregate wealth and an important change in portfolio composition: housing wealth gradually decreases, but the effects are very persistent; and financial wealth quickly shrinks, but the impact is short‐lived. I also find that the money market can be characterized as follows: (i) the money demand has a large interest elasticity and a small output elasticity; and (ii) the estimated monetary policy reaction function highlights the special focus given by the central bank to developments in monetary aggregates. These features call for an approach whereby monetary authorities put more emphasis on tracking wealth developments, in particular, given the asset portfolio rebalancing between money holdings and financial and/or housing assets.