Precautionary demand

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Precautionary demand (for money)

The need to meet unexpected or extraordinary contingencies with a buffer stock of cash.

Precautionary Demand for Money

In Keynesian economics, a need for money resulting from an unforeseen situation. Medical bills following an accident are an example of precautionary demand. According to John Maynard Keynes, people keep savings accounts, as well as some stocks and commodities, in order to cover precautionary demand if and when it occurs.
References in periodicals archive ?
Leland, H., 1968, Saving and Uncertainty: The Precautionary Demand for Saving, Quarterly Journal of Economics, 82: 465-473.
He informed that the end-June PC on Net Domestic Assets (NDA) was missed by a small margin of Rs 6 billion (0.2 percent of NDA) due to higher than-expected demand for currency, mostly driven by the financial transactions tax on non-filers of income tax returns and strong precautionary demand for liquidity in advance of the Eid holidays in early July.
This gives rise to the 'precautionary demand' for gold bullion by central banks, fund managers and individual investors, as opposed to 'use demand' by various industries.
So, our finding highlights that the interdependence between stock market and oil market is low in presence of oil precautionary demand. As our results indicate, the period of 2001-2006, the interdependence is low (less than 0.2).
A wave of extra precautionary demand for hoarding, not use, raises the price.
In this context, "precautionary demand" can play an important role in oil price movements.
However, the spot began to pick up during the fourth quarter, as OPEC supply fell and geopolitical tensions rose, leading to a buildup in precautionary demand (inventories).
Fourth, inter-bank markets were significantly impaired because of the precautionary demand for liquidity of banks exposed to rollover risks.
"This precautionary demand is currency substitution."
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).