Arbeitspapier

Limited commitment and the demand for money in the UK

In the United Kingdom, money demand deviates from the convex relationship suggested by monetary theory. Limited commitment of borrowers via banks can explain this observation. Our finding is based on a microfounded monetary model, where a money market provides insurance against idiosyncratic liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.K. data and show that limited commitment significantly improves the fit between the theoretical money demand function and the data. Limited commitment can also explain the "liquidity trap"; i.e., why the ratio of credit to M1 is currently so low, despite the fact that nominal interest rates are at their lowest recorded levels.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. 199

Classification
Wirtschaft
Subject
money demand
money markets
financial intermediation
limited commitment

Event
Geistige Schöpfung
(who)
Berentsen, Aleksander
Huber, Samuel
Marchesiani, Alessandro
Event
Veröffentlichung
(who)
University of Zurich, Department of Economics
(where)
Zurich
(when)
2015

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Berentsen, Aleksander
  • Huber, Samuel
  • Marchesiani, Alessandro
  • University of Zurich, Department of Economics

Time of origin

  • 2015

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