Fourth, inter-bank markets were significantly impaired because of the precautionary demand for liquidity of banks exposed to rollover risks.
Finally, besides the precautionary demand for liquidity by banks facing roll-over risk, relatively healthier banks can have strategic demand for liquidity for acquiring troubled banks, especially as the crisis gets deeper and bank failures become imminent.
This precautionary demand
is currency substitution.
Uncertainty regarding the level of international reserves also encouraged a precautionary demand
for gold and dollars, putting significant depreciation pressures on the exchange rate, it said.
the usual reason for insurance purchases), whereas prudence gauges the precautionary demand
Thus, precautionary demand
for savings falls--current consumption is higher.
In other words, this "M1 problem" is simply a result of the fact that an increase in the precautionary demand
for money can be satisfied by either an increase in demand for M1 or an increase in demand for NM1M2 (and perhaps NM1M3).
Limited Access to International Financial Markets and the Precautionary Demand
for International Reserves by Developing Countries
While there were some indications of efforts to pare inventories in recent months, generally optimistic business sentiment and currently trim inventories in most industries might well foster efforts to accumulate stocks at a relatively rapid pace, especially if more-buoyant-than-anticipated sales were to stimulate a precautionary demand
for inventories as had occurred in 1994.
Leland, "Saving and Uncertainty: The Precautionary Demand
for Saving," Quarterly Journal of Economics 86 , and A.
Thus, if the demand for balances were determined largely by daily precautionary demands
for excess reserves, the funds rate could become more volatile and could diverge markedly at times from its targeted level.
Unlike the two-week average demands, these daily precautionary demands
cannot help smooth the funds rate from one day to the next.