Journal of Political Economy Vol. 90 No. 3 1982
Bayesian Information and the Precautionary Demand for Money
Abstract
In this paper, I demonstrate how Bayesian information may be analyzed as a bona fide input in determining the optimal level of precautionary balances to hold. I first examine the impact of information in revising the expected total cost function and the effect of information on optimal precautionary cash balances. I then derive the optimal demand for information, and the comparative statics of θ * are developed. Finally, I examine the elasticity of precautionary balances to scale under the assumption that the degree of uncertainty of cash needs is a decision variable for the firm or household to determine. Surprisingly, monetary balances demonstrate significant economies of scale with endogenous information.
- DOI
- 10.1086/261076
- Volume
- 90
- Issue
- 3
- Pages
- 596-605
- Language
- en
- Sources
- openalex crossref