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Endogenizing Consumption Decision In The Frenkel–Jovanovic Stochastic Model Of Money Holding

Author

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  • R. AHALYA

    (Department of Humanities and Social Sciences, Indian Institute of Technology Delhi, New Delhi 110016, India)

  • R. RAMANATHAN

    (Department of Physics and Astrophysics, University of Delhi, New Delhi 110021, India)

Abstract

It is shown that the stochastic model of transaction and precautionary demand for money developed by Frenkel and Jovanovic can be made general even within the purview of their restricted treatment of the problem of estimation of optimal money holdings. While all the predecessor models on optimal money holdings assume the consumption decision to be an exogenous factor outside the realm of the model, the present treatment endogenizes the consumption decision by including an additional decision-dependent parameter in the very structure of the generalized model. In our model, it has been found that contrary to the Baumol–Tobin and Frenkel–Jovanovic models, the interest elasticity is positive when the consumption decisions are endogenous.

Suggested Citation

  • R. Ahalya & R. Ramanathan, 2016. "Endogenizing Consumption Decision In The Frenkel–Jovanovic Stochastic Model Of Money Holding," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 1-10, September.
    • Handle: RePEc:wsi:afexxx:v:11:y:2016:i:03:n:s2010495216500159
    DOI: 10.1142/S2010495216500159
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    References listed on IDEAS

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    1. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 413-435.
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    4. Jacob A. Frenkel & Boyan Jovanovic, 1980. "On Transactions and Precautionary Demand for Money," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(1), pages 25-43.
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    6. Dudley Cooke, 2012. "Optimal monetary policy in a two country model with firm-level heterogeneity," Globalization Institute Working Papers 104, Federal Reserve Bank of Dallas.
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