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Theoretical analysis of the demand of money

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  • Marvin Goodfriend
  • Bennett T. McCallum

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.

Suggested Citation

  • Marvin Goodfriend & Bennett T. McCallum, 1988. "Theoretical analysis of the demand of money," Economic Review, Federal Reserve Bank of Richmond, vol. 74(Jan), pages 16-24.
    • Handle: RePEc:fip:fedrer:y:1988:i:jan:p:16-24:n:v.74no.1
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    References listed on IDEAS

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    Cited by:

    1. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
    2. Hiroshi Fujiki, 2014. "Japanese Money Demand from the Regional Data: An Update and Some Additional Results," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 32, pages 45-102, November.
    3. Elmer Sterken, 2004. "Demand for money and shortages in Ethiopia," Applied Economics Letters, Taylor & Francis Journals, vol. 11(12), pages 759-769.
    4. Luca Gattini & Huw Pill & Ludger Schuknecht, 2015. "A global perspective on inflation and propagation channels," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(3), pages 50-76, May.
    5. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 825-860.
    6. Donou-Adonsou, Ficawoyi & Basnet, Hem C., 2019. "Credit card delinquency: How much is the Internet to blame?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 481-497.
    7. Bozhechkova Alexandra & Trunin Pavel & Sinelnikova-Muryleva Elena & Petrova Diana & Chentsov Alexander, 2018. "Building of monetary and currency markets models," Research Paper Series, Gaidar Institute for Economic Policy, issue 175P, pages 1-96.
    8. Derek Laing & Victor E. Li & Ping Wang, 2000. "Inflation, trade frictions, and productive activity in a multiple-matching model of money," FRB Atlanta Working Paper 2000-28, Federal Reserve Bank of Atlanta.
    9. Elena Sinelnikova-Muryleva, 2011. "Innovations in the sphere of payments and the money demand in Russia," Research Paper Series, Gaidar Institute for Economic Policy, issue 157P.
    10. Basnet, Hem C. & Donou-Adonsou, Ficawoyi, 2016. "Internet, consumer spending, and credit card balance: Evidence from US consumers," Review of Financial Economics, Elsevier, vol. 30(C), pages 11-22.
    11. Li, Jie & Wu, Yu & Xiao, Jing Jian, 2020. "The impact of digital finance on household consumption: Evidence from China," Economic Modelling, Elsevier, vol. 86(C), pages 317-326.
    12. Hueng, C. James, 1999. "Money demand in an open-economy shopping-time model: an out-of-sample-prediction application to Canada," Journal of Economics and Business, Elsevier, vol. 51(6), pages 489-503.
    13. 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.
    14. Hem C. Basnet & Ficawoyi Donou‐Adonsou, 2016. "Internet, consumer spending, and credit card balance: Evidence from US consumers," Review of Financial Economics, John Wiley & Sons, vol. 30(1), pages 11-22, September.
    15. Miguel Lebre de Freitas, 2014. "On inflation and money demand in a portfolio model with shopping costs," NIPE Working Papers 13/2014, NIPE - Universidade do Minho.
    16. Olga Khon, 0000. "Money Demand: The Guide to Monetary Policy in Russia, 1997-2020," Proceedings of International Academic Conferences 11113164, International Institute of Social and Economic Sciences.

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