Discussion Paper
Optimal Spending and Money Holdings in the Presence of Liquidity Constraints and Random Income Fluctuations
We examine the optimal spending behavior and money holdings of a risk averse individual who faces liquidity constraints and random fluctuations in his money income. Because of a cash-in-advance constraint, the individual has a well-defined transactions requirement for money balances. In addition, because money income is uncertain and money is — by assumption — the only available store of value, the risk averse individual also holds money balances as an inventory which can be drawn down in periods of unexpectedly low earnings.