Income, Wealth, and the Demand for Money: Some Evidence From Cross-Section Data

Abstract

In this paper we have attempted to test the income-wealth hypothesis originally suggested by Marshall and later enunciated by Hansen. The hypothesis is that both income and wealth are the determinants of the demand for money The data are drawn from the cross-section sample of the 1957–58 re-interview Surveys of Consumer Finances. The numerical elasticities of income and wealth are also derived for both liquid assets as a whole and its various components in order to make a comparison with those of prior studies. Furthermore, the findings in the present analysis have some implications as to the adequacy of the Gurley-Shaw hypothesis that a substantial volume of close substitutes for money created by non-bank financial intermediaries has tended to reduce the demand for money. The principal findings from the particular sample are that (1) not only income but also wealth has a significant positive effect on the demand for money, thereby rejecting the alternative hypotheses that either income or wealth is the unique constraint on money balances, (2) income elasticities are substantially higher than those reported in other studies, whereas wealth elasticities are almost identical, and (3) some aspects of the Gurley-Shaw hypothesis do not appear to be substantiated by this study.

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