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Post-Keynesian Theory of Demand For Money

The document summarizes several post-Keynesian theories of demand for money, including: 1) Tobin's portfolio approach, which views money as one asset among others in an individual's portfolio of wealth, including bonds, shares, and physical assets. 2) Tobin also developed a liquidity preference function showing demand for real money depends on expected returns from stocks and bonds as well as expected inflation. 3) Friedman's model divides money holders into ultimate wealth holders like households, who view money as a durable good, and business firms, with household demand for real money determined by permanent income and interest rates.

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Manepalli Yashwin
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219 views7 pages

Post-Keynesian Theory of Demand For Money

The document summarizes several post-Keynesian theories of demand for money, including: 1) Tobin's portfolio approach, which views money as one asset among others in an individual's portfolio of wealth, including bonds, shares, and physical assets. 2) Tobin also developed a liquidity preference function showing demand for real money depends on expected returns from stocks and bonds as well as expected inflation. 3) Friedman's model divides money holders into ultimate wealth holders like households, who view money as a durable good, and business firms, with household demand for real money determined by permanent income and interest rates.

Uploaded by

Manepalli Yashwin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Post-Keynesian theory of demand for money

• The portfolio approach to demand for money put forward by Tobin, Baumol and Friedman.

• The portfolio of wealth consists of money, interest-bearing bonds, shares, physical assets, etc

• Further, while according to Keynes’theory, demand for money for transaction purposes is
insensitive to interest rate, the modern theories of money demand put forward by Baumol and
Tobin show that money held for transaction purpose is interest elastic.
Tobin’s Portfolio Approach to Demand for Money

Where,
demand for real money
= expected returns on stocks
= expected returns on bonds
= expected rate of inflation
= real wealth
Tobin’s Liquidity Preference Function
Quantity Theory of Money: Friedman’s Model

Friedman divides the holders of money into two categories:

(1) The ultimate wealth holders


(2) The business firms

Demand for Money by the Ultimate Wealth Holders


It is important to note the following:
(1) The ultimate wealth holders are the households.
(2) For the households, money is just like any other durable good;
(3) Households are interested in real money
Friedman’s theory can be expressed in

Where,
demand for real money

= other variable
Thank you

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