Limited Commitment and the Demand for Money

Bibliographic Data

ID9717628
AuthorsAleksander Berentsen (University of Basel and Federal Reserve Bank of St. Louis), Samuel Huber (0000-0001-9325-8227, University of Basel), Alessandro Marchesiani (0000-0002-1866-6279, University of Liverpool)
Year2018
Volume128
Issue610
Pages1128-1156
Publication date2018-05-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (OUP) (PUBLISHER)
DOI10.1111/ecoj.12449
OpenAlexW3124489504
LanguageEN
References cited37

Understanding money demand is important for our comprehension of macroeconomics and monetary policy. Its instability has made this a challenge. Common explications for the instability are financial regulations and financial innovations that shift the money demand function. We provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data. Limited commitment can also explain why the ratio of credit to Ml is currently so low, despite that nominal interest rates are at their lowest recorded levels. In a low interest rate environment, incentives to default are high and so credit constraints bind tightly, which depresses credit activities

Demand curve · Demand deposit · Demand for money · Economics · Endogenous money · Function (biology · Incentive · Interest rate · Microeconomics · Monetary economics · Monetary policy · Economic theories and models · Economic Theory and Policy · Monetary Policy and Economic Impact

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