1 / 26

Chapter 22. Demand for Money

Chapter 22. Demand for Money. Quantity Theory of Money Keynes & Liquidity Preference Friedman’s Modern Quantity Theory Friedman vs. Keynes Empirical Evidence. Monetary Theory. link between MS and other economic variables price level output. I. Quantity Theory of Money.

onan
Télécharger la présentation

Chapter 22. Demand for Money

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 22. Demand for Money • Quantity Theory of Money • Keynes & Liquidity Preference • Friedman’s Modern Quantity Theory • Friedman vs. Keynes • Empirical Evidence

  2. Monetary Theory • link between MS and other economic variables • price level • output

  3. I. Quantity Theory of Money • classical economists • Irving Fisher • relates quantity of money to nominal income

  4. equation of exchange • MV = PY • where • M = quantity of money • P = price level • Y = real output = real income • V = velocity = # times money used to purchase output

  5. 2 assumptions • V is constant in short-run • depends on institutions, technology that change slowly • Y is at full employment level • also constant in short-run

  6. MV = PY • if V, Y constant then A change in M must cause an equal % change in P • Quantity Theory of Money

  7. money demand • MV = PY • M = (1/V)PY • M = kPY let (1/V) = k • Md = M in equilibrium • Md = kPY • Md is depends on income NOT interest rates

  8. Is V constant? NO.

  9. II. Liquidity Preference • Keynes 1936 • 3 motives to holding money • transactions motive • precautionary motive • speculative motive

  10. transactions motive • people hold money to buy stuff • as income rises, • Md rises

  11. precautionary motive • people hold money for emergencies • car breakdown • job loss • Md rises with income

  12. speculative motive • suppose store wealth as money or bonds • high interest rates • bonds more attractive, hold less money • Md negatively related to interest rate

  13. real quantity of money • M/P • if prices rise, must hold more money to buy same amount of stuff

  14. money demand (M/P) • depends on • income • interest rates M/P = f(i,Y)

  15. Keynes & velocity • MV = PY • M/P = Y/V • M/P = f(i,Y) • Y/V = f(i,Y) • V = Y/f(i,Y) • velocity fluctuates with the interest rate -- both are procyclical

  16. Tobin & money demand • further extended Keynes approach • transaction demand negatively related to the interest rate • people hold money even when is has a lower return, b/c it is less risky

  17. III. Friedman’s modern quantity theory • Milton Friedman • Md as asset demand -- wealth -- return relative to other assets

  18. Yp = permanent income • rb = expected bond return • rm = expected money return • re = expected equity return • pe = expected inflation

  19. rb - rm = relative return on bonds • pe = expected return on goods

  20. increase in Yp will increase Md • increase in relative returns of bonds, equity or money • decrease Md

  21. Friedman vs. Keynes • Friedman: • multiple rates of return • relative returns • money & goods are substitutes • Yp more important than current income

  22. stability of Md • Friedman’s Md function is more stable • Yp more stable than current income • spread between returns is more stable than returns -- interest rates have little impact on Md

  23. IV. empirical evidence • which Md function is right? • Keynes or Friedman • test • how does Md respond to i? • how stable is Md?

  24. Md is sensitive to interest rates • a lot of research reaches same conclusion • sensitivity does not change over time

  25. stability of Md • what does that mean? • relationship between Md, income, interest rates does not change over time • does Md function of 1930s still predict Md in 1950s?

  26. up until mid 1970s, Md very stable • after 1974, Md becomes less stable (M1) • old relationships overpredicting Md • financial innovations changed behaviors • Md stability for M2 breaks down in 1990s

More Related