NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On Transactions and Precautionary Demand For Money

Jacob A. Frenkel, Boyan Jovanovic

NBER Working Paper No. 288 (Also Reprint No. r0207)
Issued in October 1978
NBER Program(s):   ITI   EFG   IFM

This paper develops a stochastic framework for the analysis of transactions and precautionary demand for money. The analysis is based on the principles of inventory managements and the key feature of the model is its stochastic characteristics which lead to the need for precautionary reserves. The formal solution for optimal money holdings is derived and is shown to depend on the rate of interest, the mean rate of net disbursements, the cost of portfolio adjustment and the variance of the stochastic process governing net disbursements. One solution is obtained by minimizing the present value of financial management. This solution is compared with an alternative that is derived from the more conventional methodology of minimizing the steady-state cost function. The comparison shows that the two approaches may yield solutions that differ significantly from each other. The paper concludes with an application of the model to an empirical examination of countries' holdings of international reserves. The empirical results are shown to be consistent with the predictions of the model.

download in pdf format
   (636 K)

email paper

This paper is available as PDF (636 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0288

Published:

Users who downloaded this paper also downloaded these:
Kimball w3586 Precautionary Motives for Holding Assets
McCallum and Goodfriend w2157 Money: Theoretical Analysis of the Demand for Money
Friedman The Demand for Money: Some Theoretical and Empirical Results
Obstfeld and Rogoff w5191 The Mirage of Fixed Exchange Rates
Frenkel w0287 International Reserves Under Alternative Exchange Rate Regimes and Aspects of The Economics of Managed Float
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us