The Demand for Money

Quite possibly the most disputed area in macroeconomics is that which bears directly or indirectly on the demand for money. This has long been the case, as even a casual glance at the history of economic thought will bear out, but lately, no doubt on account of the persistent and variable inflation we have observed in recent years, interest seems to have been revived, that is, if the recent outpouring of literature on the subject has any significant bearing on the underlying problems (of unemployment and, especially, inflation). The demand for money is involved in these issues in two major ways: (a) it is quite possibly the object of monetary policy to influence it, and (2) it is a key function in all models of the economy, whether they be large or small. The latter point hardly needs elaboration, since we have already taken the consumption function in this spirit, but we should explain the unique policy attention. This, briefly, arises from the possibility that if a simple and stable demand for money exists then an activist monetary policy can gain a simple and direct leverage on both monetary and real variables in the economy. We will not be interested in the direct policy issues here although we will attempt a summary of where we stand on the stability debate; instead, we will concentrate on the traditional literature in a fashion parallel to our discussions in Chapter 2.