The Long-Run and Short-Run Demand for Money, Revisited

Abstract

THE MONEY MARKET plays a critical role in virtually all theories of income determination and is, as a result, one of the keystones of econometric modeling. Because of its central role, and to obtain unbiased and useful forecasts, considerable effort has been expended to specify and test the competing theories of money demand. Thus, much of the literature of the 1960s and early 1970s focused on whether the evidence favored the transactions or asset (or utility) theories of money demand. (The asset (utility) model appears in [16, 35]; the inventory-theoretic (transactions) approach appears in [1, 37]. Extensive reviews of the literature are available in [29, 3].) Papers by Chow [9], M. Friedman [15], Laidler [30, 31], and Meltzer [35] stand out as classics in theoretical and empirical work on money demand and are buttressed by an enormous supporting cast of papers and books that also suggest that money is demanded because it provides utility and is held for asset motives in contrast to the transactions motives stressed by the Keynesian model. The neoclassical resurgence that emphasizes monetary aggregates as opposed to money-market conditions has been fostered, in part, by these findings.

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