Transactions Demand for Money with a Stochastic, Time-Varying Interest Rate

Gregor W. Smith

15 citations0/0 files storedThe Review of Economic Studies

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Monetary Policy and Economic Impact Stochastic processes and financial applications Economic theories and models

Abstract

This paper considers a stochastic, time-varying interest rate in a continuous-time inventory-theoretic model of the demand for money. The problem of minimizing expected, discounted cash-management costs is ascribed to an agent. An optimal cash-management policy exists and is of a familiar target-threshold form. Closed-form expressions for the forward-looking, time-varying targets and thresholds are derived in special cases and implications for the dynamics of the cash balance are described.

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References

1952The Transactions Demand for Cash: An Inventory Theoretic Approach 1956The Interest-Elasticity of Transactions Demand For Cash 1969Cash Balance and Simple Dynamic Portfolio Problems with Proportional Costs 1972The Use of Forecasts and Smoothing in Control-Limit Models for Cash Management 1977Optimal Impulse Control of a Diffusion Process with Both Fixed and Proportional Costs of Control

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2011Expectancy balance model for cash flow

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