A Dynamic Baumol-Tobin Model of Money Demand

Abstract

This note considers a stochastic version of the Baumol-Tobin model of the demand for money. A dynamic demand function is derived for the case in which independent variables change to new, steady-state values. The ( S , s ) inventory policy is shown to give rise to an aggregate, partial-adjustment equation with a variable adjustment speed. The methodology is that introduced to target-threshold models by Milbourne, Buckholtz, and Wasan (1983) in their study of the Miller-Orr model.