Working Paper: NBER ID: w2157
Authors: 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.
Keywords: money demand; monetary economics; theory of money
JEL Codes: E41; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal interest rate (r) (E43) | demand for real money balances (m) (E41) |
| consumption (c) (E20) | demand for real money balances (m) (E41) |