Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/126589
Authors: 
Berentsen, Aleksander
Huber, Samuel
Marchesiani, Alessandro
Year of Publication: 
2015
Series/Report no.: 
Working Paper Series, University of Zurich, Department of Economics 199
Abstract: 
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.
Subjects: 
money demand
money markets
financial intermediation
limited commitment
JEL: 
E4
E5
D9
Document Type: 
Working Paper

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