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On the Invariance of Demand for Cash and Other Assets

In: Studies in Banking Theory, Financial History and Vertical Control

Author

Listed:
  • R. W. Clower
  • M. L. Burstein

Abstract

If the stock of cash held currently by an individual trader is defined to be the sum of his net receipts in previous periods plus some arbitrary initial balance, and if fiat money is the only asset that traders can carry over from one market period to another, then as Messrs Archibald and Lipsey have recently demonstrated,2 the trader’s equilibrium demand for real cash balances is independent of the general price level and of initial balances and is governed instead by tastes and real income.3 It is not clear, however, whether this result is valid in a model where money balances may be used to purchase and hold income-earning assets. If an individual can buy and sell bonds, for example, he can presumably effect a permanent change in his real income by substituting bonds for cash in his asset portfolio. Under these circumstances, real income is a variable rather than a parameter and the invariance of equilibrium real balances against a change in nominal money stocks or in the general price level would seem to be endangered.

Suggested Citation

  • R. W. Clower & M. L. Burstein, 1988. "On the Invariance of Demand for Cash and Other Assets," Palgrave Macmillan Books, in: Studies in Banking Theory, Financial History and Vertical Control, chapter 1, pages 3-10, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-09978-8_1
    DOI: 10.1007/978-1-349-09978-8_1
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