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Theoretical analysis of the demand of money

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Author Info
Bennett T. McCallum
Marvin S. Goodfriend

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Abstract

The paper summarizes current mainstream views concerning the theory of money demand. A utility maximizing household chooses to hold money because it facilitates transactions, allowing it to economize on shopping time. Two types of implied money demand functions are derived: a “proper” demand function with arguments exogenous to the household and a conventional “portfolio balance” relationship. The historical evolution of ideas pertaining to money demand is reviewed. A final section considers ongoing controversies concerning the role of uncertainty, the use of overlapping generations and cash-in-advance models, and the interpretation of empirical results suggestive of extremely slow portfolio adjustment.

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File URL: http://www.richmondfed.org/publications/economic_research/economic_review/pdfs/er740102.pdf
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Publisher Info
Article provided by Federal Reserve Bank of Richmond in its journal Economic Review.

Volume (Year): (1988)
Issue (Month): Jan/Feb ()
Pages: 16-24
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Handle: RePEc:fip:fedrer:y:1988:i:jan/feb:p:16-24:n:v.74no.1

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Keywords: Money Interest rates

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October. [Downloadable!] (restricted)
  2. King, Robert G. & Plosser, Charles I., 1986. "Money as the mechanism of exchange," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 93-115, January. [Downloadable!] (restricted)
  3. Feige, Edgar L & Parkin, Michael, 1971. "The Optimal Quantity of Money, Bonds, Commodity Inventories, and Capital," American Economic Review, American Economic Association, vol. 61(3), pages 335-49, June. [Downloadable!] (restricted)
  4. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Oxford University Press, vol. 12(4), pages 517-33, December.
  5. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen. [Downloadable!] (restricted)
  6. Bennett T. McCallum, 1984. "The Role of Overlapping-Generations Models in Monetary Economics," NBER Working Papers 0989, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Bennett T. McCallum, 1986. "Bank Deregulation, Accounting Systems of Exchange , and the Unit of Account: A Critical Review," NBER Working Papers 1572, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219. [Downloadable!] (restricted)
  9. Fama, Eugene F & Farber, Andre, 1979. "Money, Bonds, and Foreign Exchange," American Economic Review, American Economic Association, vol. 69(4), pages 639-49, September. [Downloadable!] (restricted)
  10. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
  11. Barro, Robert J. & Fischer, Stanley, 1976. "Recent developments in monetary theory," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 133-167, April. [Downloadable!] (restricted)
  12. Brunner, Karl & Meltzer, Allan H, 1971. "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review, American Economic Association, vol. 61(5), pages 784-805, December. [Downloadable!] (restricted)
  13. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1, pages 19-46. [Downloadable!] (restricted)
  14. Karni, Edi, 1973. "The Transactions Demand for Cash: Incorporation of the Value of Time into the Inventory Approach," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1216-25, Sept.-Oct. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002. "Optimal Monetary Policy," NBER Working Papers 9402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Robert W. Dimand, 2000. "Irving Fisher and the Quantity Theory of Money: The Last Phase," Journal of the History of Economic Thought, Taylor and Francis Journals, vol. 22(3), pages 329-348, September. [Downloadable!] (restricted)
  3. Elmer Sterken, 2004. "Demand for money and shortages in Ethiopia," Applied Economics Letters, Taylor and Francis Journals, vol. 11(12), pages 759-769, October. [Downloadable!] (restricted)
    Other versions:
  4. Derek Laing & Victor E. Li & Ping Wang, 1998. "Inflation and economic activity in a multiple matching model of money," Working Papers 1998-018, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. Derek Laing & Victor E. Li & Ping Wang, 2000. "Inflation, trade frictions, and productive activity in a multiple-matching model of money," Working Paper 2000-28, Federal Reserve Bank of Atlanta. [Downloadable!]
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