Journal of Mathematical Finance

Volume 8, Issue 2 (May 2018)

ISSN Print: 2162-2434   ISSN Online: 2162-2442

Google-based Impact Factor: 1.39  Citations  

Demand for Money in a Stochastic Environment

HTML  XML Download Download as PDF (Size: 397KB)  PP. 241-265  
DOI: 10.4236/jmf.2018.82017    850 Downloads   2,663 Views  Citations
Author(s)

ABSTRACT

The author re-examines the demand-for-money theory in an intertemporal optimization model. The demand for real money balances is derived to be a function of real income and the rates of return of all financial assets traded in the economy. Unlike the traditional money-demand relation, however, where the elasticities are assumed to be constant, the coefficients of the explanatory variables are not constant and depend on the degree of an agent’s risk aversion, the volatilities of the price level and income, and the correlation of asset returns. The author shows that the response of households to increased volatilities in the financial markets, economic activity, and prices cannot be predicted, because a rise in general uncertainties has an ambiguous impact on the demand for money. This suggests that increased uncertainty is not very helpful for the planning decisions of households, because the optimal level of money holdings in the period of uncertainty cannot be ascertained.

Share and Cite:

Atta-Mensah, J. (2018) Demand for Money in a Stochastic Environment. Journal of Mathematical Finance, 8, 241-265. doi: 10.4236/jmf.2018.82017.

Cited by

No relevant information.

Copyright © 2025 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.