The demand for money

In order to evaluate the working of a monetary system – which is one of the aims of this book – it is necessary to have evaluation criteria. It can be said that a ‘good’ monetary system is a system which is providing ‘good’ money; which, in turn requires a definition of ‘good’ money (or ‘sound money’). A currency can be considered as sound if it provides to money-holders the services they desire from money. Thus, the chapter explains the roles of money as an intermediary in exchange, as a means to do exchange over time, and – less importantly – as a standard of value. In general terms money can be defined as a ‘generalized purchasing power’. Because it provides these services, money is a useful economic good and it is desired. Therefore the chapter explains the main determinants of the demand for money, in particular the interest rate – which is the price of time – and inflation expectations (or expectations about possible changes in the purchasing power of money).