Liquidity preference as rational behaviour under uncertainty Report as inadecuate




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Abstract

An important concern of macroeconomic analysis is how interest rates affect thecash balance demanded at a certain level of nominal income. In fact, the interest-rate-elasticity of the liquidity demand determines the effectiveness of monetary policy,which is useless under absolute liquidity preference, i.e. when the money demand isperfectly elastic. An actuarial approach is developed in this paper for dealing withrandom income. Assuming investors face liquidity constraints, a level of surplus existswhich maximises expected value. Moreover, the optimal liquidity demand is expressedas a Value at Risk and the comonotonic dependence structure determines the amountof money demanded by the economy. As a consequence, the interest-rate-elasticitydepends on the kind of risks and expectations. The more unstable the economy, thegreater the interest-rate-elasticity of the money demand. Moreover, part of the adjustmentto reestablish the short-run monetary equilibrium may be performed throughvolatility shocks.



Item Type: MPRA Paper -

Institution: Katholieke Universiteit Leuven-

Original Title: Liquidity preference as rational behaviour under uncertainty-

Language: English-

Keywords: Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk-

Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - GeneralE - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the MacroeconomyE - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for MoneyE - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their PoliciesE - Macroeconomics and Monetary Economics > E0 - GeneralE - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary PolicyE - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian-





Author: Mierzejewski, Fernando

Source: https://mpra.ub.uni-muenchen.de/2771/







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