The Precautionary Demand for Narrow and Broad Money

Abstract

overdraft system exists with no effective borrowing limits. It corresponds roughly to economic units that are not operating close to their overdraft limits, in the company, local authority and non-bank intermediary sectors of the UK economy; but it may also include a large portion of high-income households and small businesses included in the All Other sector of the UK money supply statistics. The second model is similar to the first but incorporates a loan limit and a penalty interest rate for borrowing amounts above that limit. The third model covers the non-overdraft case in which overdrawn accounts incur large fixed costs, a substantial portion of which may be costs of incurring the ill will of the bank. This model corresponds roughly to the US economy in its entirety and to most of the All Other category in the UK. Both of these models draw on previous work in Sprenkle (1971), and in general came out of the tradition of bank models started