Working Paper: NBER ID: w2296
Authors: Alberto Giovannini
Abstract: This paper studies a model where money is valued for the liquidity services it provides in the future. These liquidity services cannot be provided by any other asset. Changes in expectations of the value of future liquidity services affect the desired proportions of money and other assets in agents' portfolios, and, as a result, they change nominal interest rates and real stock prices. The paper concentrates on the effects of stochastic fluctuations in the distribution of exogenous shocks. I find that changes in dividend risk have effects opposite to those in standard dynamic portfolio models without money. Furthermore, shifts between money and other assets that are driven by precautionary liquidity demand make nominal interest rates capture information about the uncertainty in the economy more accurately than any other prices in the asset markets.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in expectations regarding future liquidity services (E41) | portfolio shifts between money and other assets (G11) |
| portfolio shifts between money and other assets (G11) | nominal interest rates (E43) |
| portfolio shifts between money and other assets (G11) | real stock prices (G19) |
| increased volatility in dividend risk (G35) | higher precautionary demand for money (E41) |
| higher precautionary demand for money (E41) | portfolio shift out of stocks and into money (G11) |
| increased dividend risk (G35) | marginal utility of wealth rises (D11) |
| marginal utility of wealth rises (D11) | precautionary savings rise (E21) |
| precautionary savings rise (E21) | decrease in stock prices (G10) |
| precautionary savings rise (E21) | increase in nominal interest rates (E43) |