Revision:Introduction to Demand for Money

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MD, like the demand for any other good, is a real demand, it’s demand for the actual services yielded by the possession of a real stock of money, and not simply a demand for a nominal amount of cash denominated in $ or any other currency.

If MD stable (i.e. responds in clearly defined way to a few key variables), then changes in MS will have relatively predictable impact on prices and nominal income if the case, and MS can be controlled effectively, Monet authorities have great influence

Monetarists

Monetarists generally argue that

1. MD is relatively stable (implying stable if not constant velocity)
2. that monetary authorities can control MS effectively both reinforce belief in efficacy of Monetary policy.

Keynesians

Keynesians generally argue that

1. MD relatively unstable (implying great variability in velocity)
2. that MS effectively endogenous beyond authorities’ control

Play down imp of Monet Pol per se and advocate superiority of Fiscal Policy.

Factors Influencing MD

Broad agreement that

1. Income (however defined) - positively;
2. Interests rates (expected inflation may also; but would expect this to be reflected in nominal interest rate changes.) negatively.

(supported by almost all empirical evidence, but considerable variation in values of regression coefficients)

Point worth Mentioning

Low interest rates will reduce unearned income (pension, banks account etc), thus reduce current disposable income. Given that Income is the only (Keynes) major (Baumol) determinant of Transactions & Precautionary money demand, a reduction in income due to an interest rate cut will have the effect of reducing these money demands. Keynes argued that these money demands were i. rate insensitive, and Baumol that the relationship was inverse. (But also bear in mind fact that lower interest rates: lower mortgage payments increases real ‘effective’ disposable income). </p>

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