Essays on money demand: Efficiency gains from monetary unions and the variability of money velocity

This thesis presents two generalizations of the Baumol-Tobin model of money demand. The first essay extends that model to include several currencies and uncertainty. This model is used to study the transaction costs savings of moving from a multi-currency exchange system to a single-currency one and is calibrated to fit European data. The analysis implies an upper bound for the savings associated with reductions of transaction costs derived from the European Monetary Union of approximately 0.7% of the Community GDP.; The second essay develops a general equilibrium version of the Baumol-Tobin model of money demand. The parameter space can be divided into two subsets: one where the velocity of money behaves as conventional cash-in-advance models, and another where it changes in response to endogenous fluctuations in the interest rate. This model is used to approximate the sample moments of several economic variables estimated from U.S. data. Despite its simplicity, in terms of the number of parameters to calibrate, the model performs surprisingly well. A second empirical exercise addresses the size of the error derived from computing the costs of inflation with deterministic models. For the levels of uncertainty estimated for the U.S. economy, the size of this error is small.