Demand for money

Under demand for money means the money supply , which in the money market by the economic agents demand is. The money demand is opposed to the money supply .

General

The (latent) need for money only becomes a demand for money when the economic subjects appear as market participants on the money market and ask for money ( cash , book money , money substitutes ) there. The demand for money results from the desire of economic subjects ( private households , companies , the state with its subdivisions such as public administration or state-owned companies ) to hold a certain sum of money as cash on hand .

Money supply and money demand submitted by market participants in the money market, for which the central (money supply), banks , financial and large enterprises from the non-banking sector (money demand) belong. Also transactions of the interbank market and the international credit transactions include the demand for money.

Trade objects are central bank balance , day and time deposits , repo and lending transactions , short term securities ( money market instruments ), facilities of Central Bank (z. B. main refinancing of the ECB), money market derivatives ( forward rate agreements , overnight index swaps , money market futures ), Treasury Bills or Change .

Origin of the demand for money

Demand for money arises from the need to bridge the time gaps between income and expenditure . Therefore, demand for money arises when payments about the purchase of goods and services (for consumption or investment ), for investment or for the repayment of debt are required ( transaction balances ). If there is uncertainty about the amount of the transaction requirement, there is a demand for money to protect against illiquidity ( precautionary fund ). Money for hoarding purposes because of price and interest rate expectations (speculative fund) also creates demand for money. If the nominal gross domestic product plus trade in used goods (transaction volume) increases in the national economy at a constant velocity of circulation of money , the demand for money increases proportionally. It falls when the interest rate rises .

Money demand or cash holding theories

The money demand or cash management theories analyze the determinants of money demand. In money demand theory, the term cash management is often used as a synonym for the word holding money. This means holding money in the narrower sense, i.e. cash, means of payment and book money. The money demand theories imply that money is held not only for consumption and investment, but also for investments.

classic

In 1911, Irving Fisher specified the quantity equation of Simon Newcomb from 1885 , according to which the product of the amount of money and the velocity of money is the product of the price level and the real transaction volume: ${\displaystyle M\,}$ ${\displaystyle V\,}$ ${\displaystyle P\,}$ ${\displaystyle T\,}$

${\displaystyle M\cdot V=P\cdot T}$.

The left hand side of the identity equation represents the demand for money that is required for the transactions (purchases). With a constant velocity of circulation of money, an increase in the money supply leads to a proportional increase in the product of transaction volume and prices.

According to Arthur Cecil Pigou (1917) and Alfred Marshall (1923), the demand for money is based on the balancing of costs and benefits for the customer, with the benefit of holding money in the facilitation of transactions and the costs in lost income from alternative investments ( opportunity costs ). Pigou linked the demand for money with the resulting purchasing power , i.e. with

${\displaystyle {\frac {\text{M}}{\text{P}}}}$.

Pigou assumed that income is the main determinant of money demand. The macroeconomic demand for money is accordingly, taking into account the cash holding coefficient : ${\displaystyle Y\,}$ ${\displaystyle k\,}$

${\displaystyle {\frac {\text{M}}{\text{P}}}}$= . ${\displaystyle kY}$

Pigou and Marshall assumed that the (nominal) money demand depends proportionally on the price level and the transaction volume. Money is in demand until its marginal yield equals the marginal yield of alternative uses. The assets are structured in such a way that the marginal utility of all forms of investment is the same.

Motives for the demand for money after Keynes

From this, John Maynard Keynes derived the transaction motive of the demand for money in his liquidity preference theory in February 1936 and added the precautionary and speculative motive. Thereafter, the entire money demand transactional, caution and speculation checkout, the so-called liquidity preference results ( English liquidity preference ). While the transaction fund is used to process the planned - but not congruent in terms of time and amount - deposits and withdrawals, the precautionary fund serves as a buffer for unforeseen income / expenditure flows, the speculative fund is a form of investment. It correlates positively with national income and negatively with the prevailing interest rate level .

Transaction till motif

The classics see money primarily as a medium of exchange that allows barter between specialized economic subjects. One also speaks of the transaction register . The purpose of holding a transaction register is to balance out the distribution of income and expenses over time. The size of the transaction register depends on the size of the payment frequency and turnover.

It is assumed that there is one household that represents all households and one company that represents all companies. Without restricting the general public, it is assumed that the household sells work and the company sells goods. The average cash on hand (average transaction balance) of both business units changes if the payment rhythm (temporal distribution of income and expenses) or the amount of sales changes. If the average transaction balance is determined by the payment rhythm with a fixed annual turnover, then conversely, with a fixed payment rhythm, it is determined by the amount of the annual turnover. In the model with a given payment frequency, the following relationship exists:

${\displaystyle L_{t}=L_{t}(h)=\gamma \cdot h}$with . ${\displaystyle \gamma >0}$

Here are:

• ${\displaystyle \gamma }$: Proportionality constant (depending on the length of the planning period)
• ${\displaystyle L_{t}}$: Average transaction balance of a business entity
• ${\displaystyle h}$: Turnover of the business entity

According to the quantity equation, the demand for money as a means of payment is higher, the higher the income and the price level and the lower the velocity of circulation .

Speculative fund motif

In addition to the (neo-) classical approach, Keynes added to his total model the holding of money for transaction purposes with the holding of money for the purpose of storing value. He referred to this as the speculative fund :

${\displaystyle L_{S}=L_{S}(i)}$.

• ${\displaystyle i}$: Market rate

Individuals divide their wealth into money and other net worth components (such as physical capital, etc.). Its aim is to maximize the expected wealth ( risk diversification aspects for risk reduction were not originally considered explicitly). For example, if the economic agents expect securities prices to fall (since in this context securities are usually understood to mean bonds, falling prices correspond to rising yields), then holding money offers the possibility of avoiding expected price losses (speculative fund). However, holding money entails opportunity costs in the form of lost interest income . The demand for money from the speculative motive therefore depends negatively on the prevailing interest rate level . ${\displaystyle i}$

Precautionary checkout motif

In addition to the speculative fund, Keynes also introduced the precautionary fund :

${\displaystyle L_{v}=L_{v}(h,i)}$.

It contains money that is held by economic agents (more precisely: the non-banks ) in order to be able to carry out unforeseen transactions . It is necessary because economic agents are uncertain about their future situation and cannot precisely foresee it.

The higher the income, the greater the real size of the precautionary fund. This is due to the fact that with increasing income, more (foreseeable) transactions are made (see transaction register), which in turn brings with it uncertainty about necessary replacement purchases or repairs. The precautionary fund is often not considered independently in models, but subsumed under the transaction fund for the sake of simplicity.

Planning security, which arises from trust, reduces the effort to deposit large deposits in the precautionary fund. This is why some investors invest with foresight in activities that generate trust and planning security.

monetarism

In 1956, the founder of monetarism , Milton Friedman , viewed the demand for money as one of the many ways to invest wealth , including human capital ( labor ) as well as money itself and physical capital . For him, an essential determinant of the demand for money is the cost of holding money, which primarily includes the expected price level. The preferences regarding the use of money also played a role for him. He rejected the Keynesian precautionary and speculative fund. In 1970 Friedman advocated the thesis that the central bank could bring about an increase in money that was not based on the growth in demand for money. As a result of the additional money supply, interest rates fall, but the economic agents are not prepared to hold the larger part of the additional means of payment as cash because the more important determinants of money demand - real income and prices - are initially not affected by the larger money supply.

When the Federal Reserve System controlled the money supply M1 according to the monetarist concept from 1973 onwards , it found an unstable demand for money and broke off the experiment in 1982. Alan Greenspan followed a more Keynesian concept from 1987 and assumed an unstable demand for money.

Determinants of Money Demand

The demand for money changes proportionally to the national income . If the interest rate rises , the demand for money falls and vice versa. The causes of the demand for money can be both of a non-monetary nature (demand for goods on the goods market for consumption or investment) and of a monetary nature (demand for money on the money market for the acquisition of financial products ). The money seekers can not change the nominal amount of money, expressed in monetary units , because partial cash reductions inevitably result in corresponding cash increases for other market participants and vice versa.

species

A distinction is made between nominal and real money demand. The nominal money demand is the individual demand for a given monetary unit (e.g. euro ). The real demand for money is expressed in units of goods, i.e. the number of goods / services that money can buy. For example, if the nominal money demand is 100 euros and the price level for a commodity is 2 euros per piece, then the real money demand amounts to 50 goods units. If the price level doubles to 4 euros due to inflation, the real demand for money drops to 25 units of goods. Milton Friedman assumed that the nominal money demand increases as the price level rises, so that economic agents always have a constant real money demand at their disposal. Today, however, it is true that inflation leads to a reduction in the real demand for money, while deflation leads to an increase in it.

Money market equilibrium

The money market equilibrium arises on the money market when the demand for money coincides with the supply of money : ${\displaystyle L}$ ${\displaystyle M}$

${\displaystyle L=M}$.

This so-called LM function leads neither to inflation nor to deflation in the goods market. If money demand and money supply do not match, there is either a money gap

${\displaystyle L>M}$

or vice versa, there is a surplus of money . Money gap or money overhang produce inflationary or deflationary effects and are therefore eliminated by the central banks as part of monetary policy by controlling the money supply.

See also

• MIU model

literature

• Otmar Issing: Introduction to Monetary Theory. Vahlen Publishing House, 2003
• Manfred Borchert: Money and Credit - Introduction to Monetary Theory and Monetary Policy , 7th edition, Munich - Vienna, R. Oldenbourg Verlag, 2001.

Individual evidence

1. ^ Gabler Verlag, Gabler Wirtschaftslexikon , Volume 3, 1984, Sp. 1696
2. ↑ Bernhard Felderer / Stefan Homburg, Macroeconomics and New Macroeconomics , 1994, p. 80
3. ↑ Irving Fisher, The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises , 1911, p. 26 f.
4. ^ Arthur Cecil Pigou, The Value of Money , in: Quarterly Journal of Economics, Volume 32, 1917, p. 54
5. ^ Alfred Marshall, Credit and Commerce , 1923, pp. 41 ff.
6. ^ Alfred Marshall, Credit and Commerce , 1923, p. 38 f.
7. ↑ John Maynard Keynes, General Theory of Employment, Interest and Money , 1936, pp. 163 ff.
8. ↑ The speculative fund is interpreted as a waiver of money supply.
9. ↑ Hans-Joachim Jarchow, Theory and Politics of Money , 1998, p. 40
10. ^ Milton Friedman, The quantity theory of money - a restatement , in: Studies in the Quantity Theory of Money, 1956, p. 79
11. ^ Milton Friedman, The quantity theory of money - a restatement , in: Studies in the Quantity Theory of Money, 1956, p. 97
12. ^ Milton Friedman, The quantity theory of money - a restatement , in: Studies in the Quantity Theory of Money, 1956, p. 84
13. ↑ Milton Friedman, A Theoretical Framework for Monetary Analysis , in: The Journal of Political Economy vol. 78/2, 1970, p. 195
14. ↑ Klaus Schaper, Macroeconomics , 2001, p. 128
15. ↑ Olivier Blanchard / Gerhard Illing, Makroökonomie , 2009, p. 115 f.
16. ^ Willi Albers / Anton Zottmann (eds.): Concise Dictionary of Economics , Volume 3, 1981, p. 465
17. ^ Willi Albers / Anton Zottmann (eds.): Concise Dictionary of Economics , Volume 3, 1981, p. 465
18. ↑ Rudiger Dornbusch / Stanley Fischer / Richard Startz, Macroeconomics , 2003, p. 300
19. ↑ Jürgen Siebke / Manfred Willms, Theory of Monetary Policy , 1974, p. 92 f.
20. ↑ Ulrich CH Blum / Alexander Karmann / Marco Lehmann-Waffenschmidt / Marcel Thum / Klaus Wilder / Bernhard W. Wieland / Hans Wiesmeth, Basics of Economics , 2003, p. 130 f.