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Cash-in-advance, buffer-stock monetarism, and the loanable funds-liquidity preference debate in an open economy

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  • Miller, Norman C.

Abstract

In a flexible exchange rate open economy, the dynamics of the interest rate within a loanable funds, LF, or an "amended" liquidity preference, LP, model (wherein the latter embodies either "cash-in-advance" or "spillover" considerations) can differ substantially from the dynamics within a traditional LP model. Within the former a debt financed fiscal/investment shock can generate "interest rate overshooting," and thereby create highly volatile asset prices. Also, the LF/amended-LP model provides a new explanation for the change in the short-run response of the interest rate to monetary shocks from negative to positive in the early 1970s; that is, this may have been caused by the switch from fixed to flexible exchange rates.

Suggested Citation

  • Miller, Norman C., 1992. "Cash-in-advance, buffer-stock monetarism, and the loanable funds-liquidity preference debate in an open economy," Journal of Macroeconomics, Elsevier, vol. 14(3), pages 487-507.
    • Handle: RePEc:eee:jmacro:v:14:y:1992:i:3:p:487-507
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    Cited by:

    1. Miller, Norman C., 1995. "Towards a loanable funds/amended-liquidity preference theory of the exchange rate and interest rate," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 225-245, April.

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