Question

1. What is the difference between the precautionary demand of money and buffer stock demand for money? a. How to express mathematical uncertainty, the risk? 2. Can you show the derivation of formula (13) and (12)? a. Why are the assumptions ,  = 0 not real? b. For which demand - transactionary or precautionary - interest rate is more important factor? why? 3. What are the factors of buffer stock money demand and for precautionary demand for money? 4. How does the business cycle change the demand for Precausionary money? 5. How Precausionary and buffer stock demand for money models differ from transactionary and speculative demand for money models?

Answer 1

Precautionary demand of money

In economic theory, especially in Keynesian economics, the demand for precaution is one of the determinants of the demand for money (and credit), the others being demand for transactions and speculative demand. Preventive money demand is about maintaining real balances of money to be used in an emergency. Because income and payments cannot be fully anticipated, people maintain prudential balances to minimize the potential loss resulting from a contingency. The precautionary issue depends on the size of the income, the availability of credit and the interest rate. With more income, the demand for precautions will increase because surprises are more likely at the time or amount of proportionately high expenditure. In contrast, the more credit available (for example, the larger the untapped portion of a credit card's line of credit), the less need to maintain budget balances. A higher interest rate represents a higher opportunity cost of holding money for any reason, including the precautionary reason, and therefore leads to less precautionary availability.

Buffer stock demand for money

One of the tenets of the monetary reserve model of demand for money is that transaction monetary balances are buffers and transient monetary balances would dissipate in the long run as real demand for money adjusts to the desired level after a time. unexpected income shock. However, the poor performance of the standard partial dynamic aggregate money demand model since mid-1973 has seriously called into question the validity of the stabilizer stock model. Using panel data, this study empirically shows that the rate of adjustment is rapid at the micro level and that the long-run parametric estimates are not as implausible as those suggested in previous studies of aggregate money demand.