TY  - JOUR
AU  - Frenkel,Jacob A.
AU  - Jovanovic,Boyan
TI  - On Transactions and Precautionary Demand For Money
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 288
PY  - 1981
Y2  - September 1981
UR  - http://www.nber.org/papers/w0288
L1  - http://www.nber.org/papers/w0288.pdf
N1  - Author contact info:
Jacob Frenkel
Dr. Jacob A. Frenkel
Chairman, JPMorgan Chase International
270 Park Ave 46th floor
New York, NY 10017
Tel: +1 212 270 2393
Fax: +1 212 270 2397
E-Mail: jacob.frenkel@jpmchase.com

Boyan Jovanovic
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/998-8953
Fax: 212/995-4186
E-Mail: Boyan.Jovanovic@nyu.edu
M1  - published as published relationship to a non-chapter. This should not happen. Please contact NBER.
AB  - 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.
ER  -