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Money: Theoretical Analysis of the Demand for Money

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  • Bennett T. McCallum
  • Marvin S. Goodfriend

Abstract

This paper, prepared for the New Palgrave, attempts to summarize current mainstream views concerning the theory of money demand. A model is sketched in which a representative household is depicted as seeking to maximize utility over an infinite planting horizon, with each period's consumption and leisure appearing as arguments of the utility function. The household chooses to hold non-interest-bearing money, even in the presence of assets with positive pecuniary yields, because it facilitates transactions and thereby reduces the amount of time and/or energy required in the process of "shopping', i.e., acquiring goods to be consumed. Two distinct types of implied money-demand functions are derived: a "proper" demand function with arguments exogenous to the household and a portfolio balance relationship that is more similar in specification to the type of equation that normally appears in the money-demand literature. One section of the paper briefly reviews the historical evolution of ideas pertaining to money-demand theory, and suggests that major contributors have included Marshall, Hicks, and Sidrawki. A final section considers ongoing controversies concerning the role of uncertainty, the use of overlapping-generation and cash-in-advance approaches, and the interpretation of empirical results apparently suggestive of extremely slow portfolio adjustments.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2157.

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Date of creation: Jan 1987
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Publication status: published as McCallum, Bennett T. and Marvin S. Goodfriend. "Demand for Money: Theoreticl Studies," The New Palgrave: A Dictionary of Economics, ed. by J. Eatwell, P. Newman and M. Milgate. London: The Macmillan Press and New York: Stockton Press, 1987.
Handle: RePEc:nbr:nberwo:2157

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Cited by:
  1. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
  2. Sterken, Elmer, 1999. "Demand for money and shortages in Ethiopia," CDS Research Reports 199909, University of Groningen, Centre for Development Studies (CDS).
  3. Yan Shen & Cheng Hsiao & Hiroshi Fujiki, 2005. "Aggregate vs. disaggregate data analysis-a paradox in the estimation of a money demand function of Japan under the low interest rate policy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(5), pages 579-601.
  4. Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Working Paper, Federal Reserve Bank of Richmond 88-01, Federal Reserve Bank of Richmond.
  5. repec:hal:wpaper:halshs-00575107 is not listed on IDEAS
  6. Michael R. Pakko & William T. Gavin & Finn E. Kydland, 2005. "Monetary Policy, Taxes, and the Business Cycle," 2005 Meeting Papers 265, Society for Economic Dynamics.
  7. Christopher Adam, . "The Transactions Demand for Money in Chile," QEH Working Papers qehwps60, Queen Elizabeth House, University of Oxford.
  8. Daniel L. Thornton, 2008. "Monetary policy: why money matters and interest rates don't," Working Papers 2008-011, Federal Reserve Bank of St. Louis.
  9. Godwin Nwaobi, 2001. "A Vector Error Correction And Nonnested Modelling Of Money Demand Function In Nigeria," Econometrics, EconWPA 0111004, EconWPA.
  10. Erwin Nijsse & Elmer Sterken,, 1996. "Shortages, interest rates, and money demand in Poland, 1969-1995," Working Papers 25, Centre for Economic Research, University of Groningen and University of Twente.

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