An actuarial approach to short-run monetary equilibrium

Mierzejewski, Fernando (2007): An actuarial approach to short-run monetary equilibrium.

Abstract

The extent to which the money supply affects the aggregate cash balance demanded at a certain level of nominal income and interest rates is determined by the interest-rate-elasticity and stability of the money demand. An actuarial approach is adopted in this paper for dealing with investors facing liquidity constraints and maintaining different expectations about risks. Under such circumstances, a level of surplus exists which maximises expected value. Moreover, when the distorted probability principle is introduced, the optimal liquidity demand is expressed as a Value-at-Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the more unstable the economy, the greater the interestrate-elasticity of the money demand. Moreover, for different parametric characterisation of risks, market parameters are expressed as the weighted average of sectorial or individual estimations, in such a way that multiple equilibria of the economy are possible.

• Item Type: MPRA Paper
• 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 > E41 - Demand for Money; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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