Bayesian Information and the Precautionary Demand for Money
Journal of Political Economy
1982
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 (3)
- Pages
- 596-605
- Language
- en
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- Sources
- openalex crossref