The discussion about the role of wealth as adeterminant of the demand for money is not a new one. It is also known as Restatement of Quantity Theory of money. The American Enterprise Institute recently had a symposium on QE after 10 years. Milton Friedman propounded the Wealth Theory of Demand for Money. Essentially, Keynes’ theory of demand for money is an extension of the Cambridge cash-balances approach and stresses the asset role (i.e., the store of value function) of money.
In Keynes’ analysis an individual holds his wealth in either all money or all bonds depending upon his estimate of the future rate of interest. This creates money demand - as in Samuelson (1958) and Bewley (1980) money has value in equilibrium even though
If with the doubling of price level, nominal money holdings are also doubled, their real money balances would remain the same. Liquidity preference of a particular individual depends upon several considerations. To Keynes an individual’s total wealth consisted of money and bonds. The Demand for Money Synopsis of Theory of Money Demand –Given that bonds are risky, then the investor worrying about both risk and return is likely to do best by holding both bonds and money. In contrast to the Fisherian view of what people ‘have to hold’, the Keynesian view stated that the demand for money is determined by what people ‘want to hold’. ADVERTISEMENTS: The Keynes’ Theory of Demand for Money! intrinsically worthless, in equilibrium money can have value by a mechanism which can be related to the models of Samuelson (1958) and Bewley (1980).3 Crucially, in order for money to have value, enough agents should create demand for new savings through money to o set the supply of money by agents who want to spend it to consume. Already in the early 1960s an animated discussion developed on the relevance of various scale variables for the money demand in the wake of Friedman's permanent income hypothesis and Tobin's theory of portfolio selection. ADVERTISEMENTS: Keynes used the term ‘bonds’ to refer to all risky assets other […] Under classical theory, rate of interest is determined by A. We model money supply and demand, and the role of nancial intermediaries as follows. For instance, the money demand function may be expressed as: (M/P) d = f(r s, r b, π e, W) where r s = the expected real return on stock, r b = the expected real return on bonds, π e = the expected inflation rate and W= real wealth. Keynes treated money also as a store of value because it is an asset in which an individual can store his (her) wealth. Following a conjecture made by Friedman (1956), the authors assign a role to uncer - tainty in the money demand function. They hold money for self insurance against this risk. 43. At one point Lachman asked about the influence of asset price increases on demand. –In other words, his/her optimum portfolio of assets should … It began with Desmond Lachman interviewing Ben Bernanke. An increase in r s or r b reduces money demand, because other assets become more attractive. Money - Money - Monetary theory: The relation between money and what it will buy has always been a central issue of monetary theory. Money illusion Demand for capital and supply of savings C. Demand for investment and price level D. Demand for investment and supply of money 44. Households manage productive projects that use capital and expose them to idiosyncratic risk. Lachman referenced studies that estimated an impact of 4 cents on the dollar, presumably meaning that an extra dollar in […] This independence of real variables from changes in money supply and nominal variables is called A. money demand. They find that although uncertainty is nonstationary and subject to wide swings, it is nonetheless mean reverting and has substantial effects on the demand for money… Demand for money and supply of money B.