Discussion of “Precautionary Demand for Money in a Monetary Business Cycle Model”

Abstract

Velocity is more volatile than output and procyclical in data. However, standard CIA model implies constant (consumption) velocity (always binding CIA constraint). Agents hold exactly the amount of money necessary for desired cash-good purchase, when there is a positive cost of holding money. How can we break the (too tight) link between nominal output/consumption and money balance? Makoto Nakajima (FRB Philadelphia) Discussion of Telyukova and Visschers March 27, 2009 2 / 11Intuition: CIA and Preference Shock CIA + aggregate preference shock after money balance is chosen. Variable velocity with precautionary money demand. But the velocity fluctuates too little compared with data because aggregate consumption fluctuates too little. (quantitative puzzle, Hodrick et al. (1991)) Why idiosyncratic shock helps? Idiosyncratic preference shock might help because size of the shock is substantially larger: SD = 18% (compare with SD = 0.5 % for aggregate consumption). Volatility of idiosyncratic preference shocks is the key in calibration. Makoto Nakajima (FRB Philadelphia) Discussion of Telyukova and Visschers March 27, 2009 3 / 11What They Did Standard RBC model plus: CIA constraint. Cash goods and credit goods. Idiosyncratic preference shock. TFP and monetary policy shocks. Investigate, theoretically and quantitatively, cyclical properties of the model, with a focus on velocity