Actuarial Characterisation of the Aggregate Money Demand and the Monetary Equilibrium

An actuarial theoretical setting is presented to characterise the money demand and the monetary equilibrium. Two main hypotheses are stated that contradict assumptions normally sustained in empirical investigations of the money demand: national output is assumed to be a random variable, and people are supposed to face borrowing restrictions in money markets. The aggregate demand for balances is then determined in order to maximise the expected return of a certain portfolio combining risk and cash holdings. Yet, unlike under classical implementations of the utility maximixation approach, the prices of the underlying exposures are established in actuarial terms. Within this framework, the efficacy of monetary policy is shown to be explicitly affected by the statistical description of the series of national output returns. As a conclusion, in order to pursue monetary interventations ensuring sustainable growth and financial stability, monetary authorities must necessarily pay attention to nominal fluctuations