Keynes's Money Demand Theory and Its Development
Keynes's theory of money demand is mainly based on liquidity preference theory proposed in his masterpiece "General Theory of Employment Interest and Money". Because Keynes studied under Marshall, his money demand theory is the logical development of Cambridge's money demand theory to some extent. In the quantity theory of money of Cambridge school, the question is why people hold money. The answer to this question directly leads to Cambridge's analysis of the transaction demand of people holding money. However, the defect of Cambridge theory is that it does not make in-depth analysis. Different from Cambridge's predecessors, Keynes analyzed people's motives for holding money in detail, and analyzed the income of people holding money more accurately. According to the analysis of general theory, people's motives for holding money include trading motives, cautious motives and speculative motives. Correspondingly, people's needs for holding money include trading needs, cautious needs and speculative needs. Among these three demands, it is generally assumed that trading demand and speculative demand are additive and separable, and prudent demand belongs to trading demand and speculative demand respectively, so Keynes's monetary demand consists of the following two parts: m = m1+m2 = l1(y)+L2 (r). Because of the central role of Keynes's theory of money demand in modern macroeconomics and macroeconomic policy-making, it is very important to further improve and deepen Keynes's liquidity preference theory, which became the mainstream of monetary theory development from postwar to 1970s.
The first development of Keynes's monetary theory is a more detailed study of trading motives. Keynes believed in principle that the trading motivation of people holding money mainly depends on the scale variable. Although Keynes did not deny that trading demand was related to interest rate, he did not give a specific and clear relationship. Around this question, baumol (1952) and Tobin (1956) gave a general answer with the inventory cost model. Baumol (1952) and Tobin (1956) assume that whether people hold money includes two related expenses: the opportunity loss of holding cash and the commission fee for disposing of securities. Because these two costs have ups and downs, personal decisions will be faced with choices and trade-offs, and the total cost will be minimized, which can be summed up into baumol's famous square root law: m = (2bt)/. This formula shows that the elasticity of money demand with income T and interest rate is 1/2, which means that money is not a luxury, and its deeper meaning is that the more balanced income distribution, the greater the total demand for money, or the more unbalanced income distribution, the lower the total demand for money.
Cautious motivation mainly depends on the uncertainty of the future. As Keynes pointed out, "the currency held by this motive is to prevent unscrupulous spending or irreversible favorable buying opportunities." However, Keynes's analysis of how uncertainty affects money demand was not detailed, which led later economists to expand and further standardize in different directions. One of the most famous extensions is Tobin's quadrant analysis of money demand. Tobin skillfully brings prudent demand, trading demand and speculative demand into a unified analytical framework, and limits prudent motivation to the uncertainty of interest rates. Other developments of prudent demand model are directly based on the uncertainty of income or expenditure. For example, the prudent money demand model proposed by Whelan (1966) belongs to this type. The model assumes that the net expenditure after balance of payments obeys a certain probability distribution centered on zero, and σ is the standard deviation of net expenditure. By setting an appropriate risk probability, Whelan derived the money demand formula of cube root law: M=2σ2br 13.
Speculative motivation is one of the motivations that Keynes pays most attention to and attaches great importance to, and it is a remarkable feature that distinguishes Keynes's monetary theory from other monetary theories. However, Keynes's speculative model is a pure speculative money demand model, in which speculators are faced with an either-or choice. Under the expected interest rate, individuals either hold all the money or all the bonds, and they are blind speculators, not diversified speculators. In order to overcome this defect, Tobin (1958) developed Keynes's pure speculative money demand model according to markowitz's modern portfolio theory. This theory can be illustrated by the separability theorem. First, investors determine the effective set or effective boundary of assets according to the returns and risks of various risky assets, which has nothing to do with personal preferences. After the introduction of risk-free currency, the effective set of investors has changed from the origin to a straight line tangent to the effective boundary. Secondly, which point on the straight line an individual chooses as the optimal decision point depends on the indifference curve of individual risk and return. The tangent point of indifference curve and straight line is the optimal choice of investors, which determines the proportion of money in all financial assets, and the speculative demand for money is also determined.
What is the decisive factor of money demand in Keynes's theory of money demand? In Keynes's theory of money demand, the decisive factors of money demand are two factors: commodity income and interest rate.
Keynes's research on money demand is based on the research on the demand motivation of economic subjects. Keynes believed that people's demand for money stems from three motives: ① transaction motivation: in order to pay for daily transactions, people must hold money; 2 preventive motivation: also known as cautious motivation, holding money to deal with some sudden emergency payments; ③ Speculative motivation: Due to the uncertainty of future interest rates, people hold money to avoid capital loss or increase capital gains and adjust the asset structure in time. Among the three motives of money demand, the money demand caused by transaction motivation and cautious motivation is related to the transaction of goods and services, so it is called transactional money demand (L 1). The money demand generated by speculative motives is mainly used for speculation in financial markets, so it is called speculative money demand (L2). The total demand for money (L) is equal to the sum of trading demand (L 1) and speculative demand (L2). For transactional demand, Keith thinks it is related to the goods and services to be traded. If national income (y) is used to represent this quantity, then the transaction demand of money is a function of national income, which is expressed as L 1 = L 1 (Y). And the more income, the more trading demand, so this function is the increasing function of income. For speculative demand, Keynes thinks it is mainly related to the interest rate (I) in the money market. The lower the interest rate, the more speculative money is needed. Therefore, speculative money demand is a decreasing function of interest rate, expressed as L2 = L2 (I). However, when the interest rate drops to a certain low point, the money demand will become infinite, that is, it will enter what Keynes called the "liquidity trap", so that the money demand function can be written as:
L=L 1(Y)+L2(i)=L(Y，I)
In other words, the total demand for money is determined by income and interest rate.
In Keynes's theory of money demand, the money demand affected by interest rate is (). C
The other two are affected by income.
How to understand Keynes's theory of money demand can be considered as Keynes's explanation of why people hold money.
Why do people hold cash currency? Why don't they put it in the bank to earn interest or invest? Keynes said that although there is no benefit in holding cash currency, we must have some money in our pockets to meet our daily needs, so that we don't have to go to the bank to withdraw money to buy a candy. If we go to the bank to withdraw money to buy food every day, it is a waste of time and energy, which means the cost is too high, so we must hold some cash currency. Second, sometimes I suddenly see some good speculative opportunities, so I can't make small money (I don't have to pay the bank interest rate) and I can't make big money (speculative income). Third, natural and man-made disasters are inevitable in a person's life, so we should save some money for self-defense, such as seeing a doctor and so on.
What is Keynes's theory of money demand? Answer in two days. Keynes's research on money demand is based on the research on the demand motivation of economic subjects. Keynes believed that people's demand for money stems from three motives:
① Trading motivation: In order to pay for daily transactions, people must hold money;
2 preventive motivation: also known as cautious motivation, holding money to deal with some sudden emergency payments;
③ Speculative motivation: Due to the uncertainty of future interest rates, people hold money to avoid capital loss or increase capital gains and adjust the asset structure in time.
Among the three motives of money demand, the money demand caused by transaction motivation and cautious motivation is related to the transaction of goods and services, so it is called transactional money demand (L 1). The money demand generated by speculative motives is mainly used for speculation in financial markets, so it is called speculative money demand.
What kinds of demands does Keynes's theory of money demand consist of? 1. Transaction demand, that is, people's motivation to hold money to meet daily transactions.
2. Preventive demand, that is, people's motivation to hold money in order to prevent some emergencies.
3. Speculative demand, that is, people's motivation to hold money in order to seize the favorable opportunity to buy securities.
Among them, transactional demand and preventive demand are considered as functions of income y, which change in the same direction as y; L 1=L(y) investment demand is considered as a function of interest rate r, which varies inversely with r, and L2=L(r).
L=L 1+L2=L(y，r)=ky-hr
What does the western money demand theory in western economics include? Thank you, and God bless you. Your teacher is so abnormal. We have never left such homework. Keynes's theory of money demand is mainly based on liquidity preference theory proposed in his masterpiece "General Theory of Employment Interest and Money". Because Keynes studied under Marshall, his monetary theory is the logical development of Cambridge's monetary demand theory to some extent. Keynes's Money Demand Theory and Its Development Keynes's Money Demand Theory is mainly based on liquidity preference theory, which was put forward by Keynes in his masterpiece "General Theory of Employment Interest and Money". Because Keynes studied under Marshall, his monetary theory is the logical development of Cambridge's monetary demand theory to some extent. In the quantity theory of money of Cambridge school, the question is why people hold money. The answer to this question directly leads to Cambridge's analysis of the transaction demand of people holding money. However, the defect of Cambridge theory is that it does not make in-depth analysis. Different from Cambridge's predecessors, Keynes analyzed people's motives for holding money in detail, and analyzed the income of people holding money more accurately. According to the analysis of general theory, people's motives for holding money include trading motives, cautious motives and speculative motives. Correspondingly, people's needs for holding money include trading needs, cautious needs and speculative needs. Among these three demands, it is generally assumed that trading demand and speculative demand are additive and separable, and prudent demand belongs to trading demand and speculative demand respectively, so Keynes's monetary demand consists of the following two parts: m = m1+m2 = l1(y)+L2 (r). Because of the central role of Keynes's theory of money demand in modern macroeconomics and macroeconomic policy-making, it is very important to further improve and deepen Keynes's liquidity preference theory, which became the mainstream of monetary theory development from postwar to 1970s. The first development of Keynes's monetary theory is a more detailed study of trading motives. Keynes believed in principle that the trading motivation of people holding money mainly depends on the scale variable. Although Keynes did not deny that trading demand was related to interest rate, he did not give a specific and clear relationship. Around this question, baumol (1952) and Tobin (1956) gave a general answer with the inventory cost model. Baumol (1952) and Tobin (1956) assume that whether people hold money includes two related expenses: the opportunity loss of holding cash and the commission fee for disposing of securities. Because these two costs have ups and downs, personal decisions will be faced with choices and trade-offs, and the total cost will be minimized, which can be summed up into baumol's famous square root law: m = (2bt)/. This formula shows that the elasticity of money demand with income T and interest rate is 1/2, which means that money is not a luxury, and its deeper meaning is that the more balanced income distribution, the greater the total demand for money, or the more unbalanced income distribution, the lower the total demand for money. Cautious motivation mainly depends on the uncertainty of the future. As Keynes pointed out, "the currency held by this motive is to prevent unscrupulous spending or irreversible favorable buying opportunities." However, Keynes's analysis of how uncertainty affects money demand was not detailed, which led later economists to expand and further standardize in different directions. One of the most famous extensions is Tobin's quadrant analysis of money demand. Tobin skillfully brings prudent demand, trading demand and speculative demand into a unified analytical framework, and limits prudent motivation to the uncertainty of interest rates. Other developments of prudent demand model are directly based on the uncertainty of income or expenditure. For example, the prudent money demand model proposed by Whelan (1966) belongs to this type. The model assumes that the net expenditure after balance of payments obeys the probability distribution centered on zero, and σ is the standard deviation of net expenditure. By setting an appropriate risk probability, Whelan derived the money demand formula of the cube root law: M=2σ2br 13, which was a motive that Keynes paid most attention to and an obvious feature that distinguished Keynes's monetary theory from other monetary theories. However, Keynes's speculative model is a purely speculative money demand model. In this model, speculators face an either-or choice. Under the expected interest rate, individuals either hold all the money or all the bonds. Individuals are blind speculators, not diversified speculators. In order to overcome this defect, Tobin (1958) developed Keynes's pure speculative money demand model according to markowitz's modern portfolio theory. This theory can be illustrated by the separability theorem. First, investors determine the effective set or effective boundary of assets according to the returns and risks of various risky assets, which has nothing to do with personal preferences. After the introduction of risk-free currency, the effective set of investors has changed from the origin to a straight line tangent to the effective boundary. Secondly, which point on the straight line an individual chooses as the optimal decision point depends on the indifference curve of individual risk and return. The tangent point of indifference curve and straight line is the optimal choice of investors, which determines the proportion of money in all financial assets, and the speculative demand for money is also determined.
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How does Keynes's money demand theory graphically express L=L(Y)+L(R)? Money demand is divided into trading demand, emergency demand and speculative demand. The first two items are related to income, and the latter one is related to interest rate, which is an L-shaped curve. This is because there will be a "traffic trap"
What is the basic content of Keynes's money demand theory? Thank you, and God bless you. 1\ Keynes believed that the level of production and employment depends on the level of total demand. It is believed that * * * can reduce interest rates, expand money supply, promote entrepreneurs to expand investment, increase employment and output, and achieve the monetary policy goal of * * *. 2\ People's monetary demand behavior is determined by three motives: trading motivation, prevention motivation and speculation motivation. 3. Theoretical formula: m = mi+m2 = l1(y)+L2 (r)-= l (y, r).