Demand for money
DEMAND FOR MONEY
(demand for money) Recognition of the existence of a stable demand for money formed again the theory of monetarism. Based on this assumption, it can be shown that fiscal policy is neutral, i.e. when government spending pushes interest rates up, private sector investment falls accordingly. Moreover, changes in the money supply are a necessary and sufficient condition for changes face value gross domestic product (gross domestic product) or changes in inflation rates. However, in the course of econometric studies, it was not possible to reliably establish whether the demand for money is actually stable.
Finance. Dictionary. 2nd ed. - M.: "INFRA-M", Publishing house "Ves Mir". Brian Butler, Brian Johnson, Graham Sidwell, etc. General edition: Doctor of Economics Osadchaya I.M.. 2000 .
Demand for money
Demand for money is the amount of liquid assets that people are willing to hold at the moment. The demand for money depends on the amount of income received and the opportunity cost of holding this income, which is directly related to the interest rate.
In English: Demand for money
Finam Financial Dictionary.
See what "Demand for money" is in other dictionaries:
- (demand for money) Recognition of the existence of a stable demand for money formed the basis of the theory of monetarism. Based on this assumption, it can be shown that fiscal policy(fiscal policy) is neutral, that is, ... ... Glossary of business terms
DEMAND FOR MONEY- - has a different interpretation in various theories. Monetarism considers money in circulation as the main instrument of macroeconomic analysis. Within the framework of the quantitative theory of money, S. per day is determined in accordance with ... ... Economics from A to Z: Thematic guide
DEMAND FOR MONEY- (English demand for money) - a generalizing concept used in economic analysis to explain desire economic entities to have at its disposal a certain amount of means of payment, or the general need of the market for money ... ... Financial and Credit Encyclopedic Dictionary
- (transactions demand for money) Demand for money to finance current expenses. Being part of the theory of liquidity preference (liquidity preference) J. M. Keynes, this demand is in many ways similar to the demand for money in quantity theory ... ... Glossary of business terms
The amount of money people want to have to use as a medium of exchange for making payments. The demand for money for transactions changes in direct relation to the change in nominal GDP. In English: Transactions ... Financial vocabulary
The amount of money people are willing to keep as savings. The demand for money as an asset varies inversely with the interest rate. With low interest rates or low opportunity costs of holding money, people... ... Financial vocabulary
Demand for money that is not elastic with respect to interest- Demand for money, insensitive to changes interest rate …
Interest elastic demand for money- Demand for money, sensitive to changes in interest rates ... Modern Money and Banking: A Glossary
Demand for money for speculative purposes- SPECULATIVE DEMAND FOR MONEY cash balances that are held in liquid form so that they can be used to profit if the price of an asset declines. The decision to keep cash balances depends on the interest rate. If the current ... ... Dictionary-reference book on economics
DEMAND FOR MONEY, TOTAL- the sum of the demand for money for transactions and the demand for money from assets; the ratio between the total demand for money, nominal GNP and the interest rate... Big Economic Dictionary
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Demand for money - the amount of money that households and firms want to have at their disposal, depending on the nominal gross domestic product (GDP in monetary terms) and the rate loan interest. The demand for money is made up of the demand for money for transactions and the demand for money from the asset side. Demand for money for transactions (operational demand for money) - demand from households and firms to purchase goods and services, settle their obligations. The operational demand for money depends on:
From the volume of nominal gross domestic product: the more goods and services are produced, the more money is needed to service trade and payment transactions;
The greater the velocity of circulation of money, the less babbling is needed for commercial transactions and vice versa;
The level of income in society: the higher it is, the more transactions are made and the more money is required to complete these transactions;
Price level: the higher it is, the more money is needed to carry out trade transactions.
With a certain simplification, we can say that the operational demand for money changes in proportion to the nominal gross domestic product and does not depend on the interest rate. The graph of demand for money for transactions Dm1 is shown in figure a and looks like a vertical straight line.
What is the money supply? What factors determine it?
The money supply is understood as the money supply in circulation, i.e. set of means of payment circulating in the country in this moment.
The supply of money in the economy is carried out by the state through the banking system, which includes central bank(CB) and commercial banks (CB). In general, the money supply includes cash and deposits.
The Central Bank can control the money supply by influencing the monetary base. A change in the monetary base has a multiplier effect on the money supply.
1) retail turnover. Revenue depends on its volume and structure trade organizations, receipt of proceeds from passenger transport;
2) the receipt of taxes and fees from the population;
3) receipts to accounts on deposits with Sberbank and commercial banks;
4) receipt of cash from the sale of state and other valuable papers;
5) gold and foreign exchange reserves. Their increase creates conditions for an active monetary policy for open market, in determining the volume of credit resources and allows you to increase the money supply;
6) general deficit financial balance and its most important part - the budget deficit. The budget deficit shows the lack of funds to pay wages and funding others public spending. The deficit is relative, it must have financial sources coverage either through a direct loan to the government from Central Bank or by acquiring government securities by the Central Bank. In any case, the budget deficit affects the money supply and the issue of money;
With what tools monetary policy Does the government regulate the money supply?
The main tools of the central bank in the implementation of monetary policy:
Regulation of official reserve requirements
It is a powerful means of influencing the money supply. The amount of reserves (part banking assets, which any commercial Bank is obliged to keep in the accounts of the central bank) largely determines its credit capabilities. Lending is possible if the bank has enough funds in excess of the reserve. Thus increasing or decreasing reserve requirements The Central Bank can regulate the lending activity of banks and, accordingly, influence the money supply.
Operations in open markets
The main tool for regulating the money supply is the purchase and sale of government securities by the Central Bank. When selling and buying securities, the Central Bank tries to influence the volume of liquid funds of commercial banks by offering favorable interest. By buying securities on the open market, he increases the reserves of commercial banks, thereby contributing to an increase in lending and, accordingly, growth money supply. The sale of securities by the Central Bank has the opposite effect.
Regulation of the discount rate of interest (discount policy)
Traditionally, the Central Bank provides loans commercial banks. The rate of interest at which these loans are issued is called the discount rate of interest. By changing the discount rate of interest, the central bank affects the reserves of banks, expanding or reducing their ability to lend to the population and enterprises.
The Central Bank can carry out indirect regulation of the monetary sphere using the following tools:
norm required reserves. Their change affects the monetary base, respectively, and the money supply;
· the refinancing rate, i.е. the rate at which the Central Bank lends to the CB, a change in which leads to a change lending rates KB;
open market operations, which are the purchase and sale of government securities in financial system. These operations affect the value bank reserves and hence the total money supply.
Money and financial markets. Walras' law for the financial market
The money market is a part (segment) of the financial market. The financial market is divided into the money market and the securities market. In order for the financial market to be in equilibrium, it is necessary that one of the markets included in it be in equilibrium, then the other market will also automatically be in a state of equilibrium. This follows from Walras' law, which states that if there are n markets in an economy, and there is equilibrium on (n - 1) markets, then there will be equilibrium on the nth market. Another formulation of Walras's law: the sum of excess demand in parts of the markets must be equal to the sum of excess supply in the remaining markets. The application of this law to a financial market consisting of two markets allows us to limit our analysis to the study of equilibrium in only one of these markets, namely - money market, since the equilibrium in the money market will provide automatic equilibrium in the securities market. Let us prove the applicability of the Walrasian law for the financial market.
Each person (as a rationally acting economic agent) forms a portfolio of financial assets, which includes both monetary and non-monetary financial assets. This is necessary because money has the property of absolute liquidity (the ability to quickly and cost-free turn into any other assets, real or financial), but money has a zero return. But non-monetary financial assets generate income (stocks - dividends, and bonds - interest). To make the analysis easier, let's assume that only bonds are traded in the securities market. Forming his portfolio of financial assets, a person is limited by the budget constraint: W = M D + B D , where W is the nominal financial wealth of a person, M D is the demand for monetary financial assets in nominal terms and B D is the demand for non-monetary financial assets (bonds - bonds) in nominal terms expression.
In order to eliminate the influence of inflation, it is necessary to use real, not nominal, values in the analysis of the financial market. In order to obtain the budget constraint in real terms, all nominal values should be divided by the price level (P). Therefore, in real terms, the budget constraint will take the form:
Since we assume that all people act rationally, this budget constraint can be viewed as an aggregate budget constraint (at the level of the economy as a whole). And the real financial wealth of society (W/P), i.e. the supply of all types of financial assets (monetary and non-monetary) is equal to: W/P = (M/P) S + (B/P) S . Since the left parts of these equalities are equal, then the right parts are also equal: (M/P) D + (B/P) D = (M/P)S + (B/P)S, hence we get that: (M/P ) D - (M/P) S = (B/P) S - (B/P) S
Thus, the Walrasian law for the financial market has been proved. Excess demand in the money market is equal to excess supply in the bond market. Therefore, we can restrict our analysis to the study of equilibrium conditions only in the money market, which means automatic equilibrium in the bond market and, therefore, in financial market generally.
Consider, therefore, the money market and the conditions for its equilibrium. As you know, in order to understand the patterns of functioning of any market, it is necessary to study supply and demand, their relationship and the consequences (impact) of their changes on the equilibrium price and equilibrium volume in this market.
Demand for money, its types and factors
The types of demand for money are due to two main functions of money: 1) the function of a medium of circulation and 2) the function of a stock of value. The first function determines the first type of demand for money - transactional. Since money is a medium of exchange, i.e. act as an intermediary in the exchange, they are necessary for people to buy goods and services, to complete transactions.
Transaction demand for money is the demand for money for transactions (transactions), i.e. to buy goods and services. This type of demand for money was explained in the classical model, was considered the only type of demand for money, and was derived from the equation of the quantity theory of money, i.e. from the equation of exchange (proposed by the American economist I. Fisher) and the Cambridge equation (proposed by the English economist, professor at Cambridge University A. Marshall).
From the equation of the quantity theory of money (Fischer's equation): M x V \u003d P x Y it follows that the only factor in the real demand for money (M / P) is the amount of real output (income) (Y). A similar conclusion follows from the Cambridge equation. Deriving this equation, A. Marshall suggested that if a person receives a nominal income (Y), then he keeps a certain share of this income (k) in the form of cash. For the economy as a whole, nominal income is equal to the product of real income (output) and the price level (Р x Y), from here we obtain the formula: М = k РY, where М is nominal demand for money, k is the liquidity ratio showing what share of income is kept by people in the form of cash, P is the price level in the economy, Y is real output (income). This is the Cambridge equation, which also shows the proportional dependence of the demand for money on the level of total income (Y). Therefore, the formula for transactional demand for money is: (M/P) D T = (M/P) D (Y) = kY. (Note: The equation of exchange can be derived from the Cambridge equation, since k = 1/V).
Since the transactional demand for money depends only on the level of income (and this dependence is positive) (Fig. 1. (b)) and does not depend on the interest rate (Fig. 1. (a)), it can be graphically represented in two ways:
The point of view that the only motive for the demand for money is to use them to make transactions existed until the mid-1930s, until Keynes's book "The General Theory of Employment, Interest and Money" was published, in which Keynes addressed the transactional motive of demand for money added 2 more motives for the demand for money - the precautionary motive and the speculative motive - and accordingly proposed 2 more types of demand for money: prudent and speculative.
Prudent demand for money (precautionary demand for money) is explained by the fact that in addition to planned purchases, people also make unplanned purchases. anticipating similar situations When money may be needed unexpectedly, people keep additional amounts of money in excess of what they need for planned purchases. Thus, the demand for money from the precautionary motive also follows from the function of money as a medium of exchange. According to Keynes, this type of demand for money does not depend on the interest rate and is determined only by the level of income, so its schedule is similar to the schedule of transactional demand for money.
The speculative demand for money is due to the function of money as a store of value (as a store of value, as a financial asset). However, as a financial asset, money only retains value (and even then only in a non-inflationary economy), but does not increase it. Cash has absolute (100%) liquidity, but zero yield. At the same time, there are other types of financial assets, for example, bonds, which generate income in the form of interest. Therefore, the higher the interest rate, the more a person loses by keeping cash and not acquiring interest income bonds. Consequently, the determining factor in the demand for money as a financial asset is the interest rate. The interest rate is the opportunity cost of holding cash. High stake percent means high yield bonds and the high opportunity cost of holding money on hand, which reduces the demand for cash. At a low rate, i.e. low opportunity costs of holding cash, the demand for it increases, because with a low profitability of other financial assets, people tend to have more cash, preferring its property to absolute liquidity. Thus, the demand for money depends negatively on the interest rate, so the speculative demand for money curve has a negative slope (Fig. 2. (b)). This explanation of the speculative motive for the demand for money, proposed by Keynes, is called the liquidity preference theory. The negative relationship between the speculative demand for money and the interest rate can be explained in another way - from the point of view of people's behavior in the securities (bonds) market. From the theory of liquidity preference comes the modern portfolio theory of money. This theory starts from the premise that people build a portfolio of financial assets in such a way as to maximize the return received from these assets, but minimize the risk. Meanwhile, it is the most risky assets that bring the most big income. The theory starts from the already familiar idea of an inverse relationship between the price of a bond, which is the discounted amount of future earnings, and the interest rate, which can be thought of as a discount rate. The higher the interest rate, the lower the price of the bond. It is profitable for stock speculators to buy bonds at the lowest price, so they exchange their cash by buying bonds, i.e. demand for cash is minimal. The rate of interest cannot always be kept at high level. When it starts to fall, the price of bonds rises, and people start selling bonds at higher prices than they bought them for, while receiving a difference in prices, which is called capital gain. The lower the interest rate, the higher the price of bonds and the higher the capital gain, so it is more profitable to exchange bonds for cash. The demand for cash is on the rise. When the interest rate starts to rise, speculators start buying bonds again, reducing the demand for cash. Therefore, the speculative demand for money can be written as: (M/P) D A = (M/P) D = - hR.
The total demand for money is made up of transactional and speculative: (M/P) D = (M/P) D T + (M/P) D A = kY – hR, where Y is real income, R is the nominal interest rate, k is the sensitivity (elasticity) of changes in the demand for money to changes in the level of income, i.e. a parameter that shows how much the demand for money changes when the level of income changes per unit, h is the sensitivity (elasticity) of a change in the demand for money to a change in the interest rate, i.e. a parameter that shows how much the demand for money changes when the interest rate changes by one percentage point (the parameter k in the formula is preceded by a plus sign, since the relationship between the demand for money and income level is direct, and the parameter h is preceded by a minus sign because the relationship between the demand for money and the rate of interest is inverse).
AT modern conditions representatives of the neoclassical direction also recognize that the factor of demand for money is not only the level of income, but also the interest rate, and the relationship between the demand for money and the interest rate is inverse. However, they still adhere to the point of view that there is only one motive for the demand for money - transactional. And it is transaction demand that inversely depends on the interest rate. This idea was proposed and proved by two American economists William Baumol (1952) and laureate Nobel Prize James Tobin (1956) and is called the Baumol-Tobin cash management model.
money offer
The money supply is the presence of all money in the economy, i.e. this is the money supply. To characterize and measure the money supply, various generalizing indicators, the so-called monetary aggregates, are used. In the United States, the money supply is calculated on four monetary aggregates, in Japan and Germany - on three, in England and France - on two. This is due to the features monetary system this or that country, in particular the importance various kinds deposits.
However, in all countries the system of monetary aggregates is built in the same way: each next aggregate includes the previous one.
Consider the US monetary aggregate system.
The monetary aggregate M1 includes cash (paper and metal, i.e. banknotes and coins - currency) (in some countries, cash is allocated to a separate aggregate - M0) and funds on current accounts (demand deposits), i.e. checking deposits or demand deposits.
M1 = cash + checking deposits (demand deposits) + travelers checks
The M2 money supply includes the M1 money supply and funds in non-checking savings accounts (save deposits), as well as small (up to $100,000) time deposits.
М2 = М1 + savings deposits + small term deposits.
The M3 money supply includes the M2 money supply and funds in large (over $100,000) time deposits.
M3 = M2 + large time deposits + certificates of deposit.
The monetary aggregate L includes the monetary aggregate M3 and short-term government securities (mainly treasury bills - treasury bills)
L = M3 + short-term government securities, treasury savings bonds, commercial paper
The liquidity of monetary aggregates increases from the bottom up (from L to M0), and the yield increases from top to bottom (from M0 to L).
The components of monetary aggregates are divided into: 1) cash and non-cash money and 2) money and “near-money”
Cash includes banknotes and coins in circulation, i.e. outside the banking system. it debentures Central Bank. All other components of monetary aggregates (i.e. those in banking system) represent non-cash money. These are debt obligations of commercial banks.
Money is only the monetary aggregate M1 (i.e. cash - C (currency), which is the obligations of the Central Bank and has absolute liquidity and zero yield, and funds on current accounts of commercial banks - D (demand deposits), which are the obligations of these banks): M \u003d C + D
If funds from savings accounts are easily transferred to current accounts (as in the US), then D will include savings deposits.
Monetary aggregates M2, M3 and L are "almost money" because they can be turned into money (as you can: a) either withdraw funds from savings or time accounts and turn them into cash, b) or transfer funds from these accounts to a current account, c) or sell government securities).
Thus, the money supply is determined by economic behavior:
- the Central Bank, which secures and controls cash (C);
- commercial banks (banking sector of the economy) that keep funds in their accounts (D)
- of the population (households and firms, i.e. the non-banking sector of the economy), who decide in what ratio to divide funds between cash and funds into bank accounts(deposits).
Demand for money is the need for a certain amount Money. It is determined by how many material resources businesses and the public are willing to keep in checks and cash.
The demand for money is a natural phenomenon in the market. Two approaches can be considered to explain it:
Classical (monetarist);
Keynesian.
The classical approach determines the demand for the money supply from the position of the equation: RU = MB, while M is the money in circulation, B is the speed at which money is circulated, P is the price index, Y is the size of the issue. It must be taken into account that the speed is a constant value. When considering the situation in the long run, of course, B can change. For example, if in banking new technologies emerge.
From the above equation, we can conclude that depends on the dynamics GDP changes or RU. If this value increases by 3% per year, then the demand for money will increase by the same amount. So, the cash is pretty stable.
As in any market, along with needs, there are those who are ready to satisfy them. The money supply is quite unstable, it depends on government decisions. But in accordance with the classical theory, or Y, on the contrary, changes slowly. A significant role here is played by factors of production, which are usually quite stable in the short run. Therefore, it is better to consider a change in the money supply within one year or more. This indicator has a significant impact on the price level and has almost no effect on employment. This phenomenon in the economy is called monetary neutrality. The monetarist rule states that the government should strive to maintain the growth rate of the money supply at the level of GDP. Then their supply will correspond to demand, and prices in the economy will be stable.
Quantity theory explains two motives for money demand. The first of these is that companies and people need cash, as it is a transaction servicing tool. The purchase of goods or services occurs mostly when they are exchanged for banknotes and coins. Less commonly, the buyer and seller use barter - (services) for another product (service). The need for funds for purchases is called the demand for money for transactions. Let's look at a few factors that affect it:
The volume of goods currently on the market;
The level of prices for services and goods;
national income.
But greatest influence renders the level of income: M = Ufact. Here M is the demand for money, Ufact. - national income.
The second motive for money demand has to do with precautionary purchases. It arises due to the fact that people often have to deal with payments that they could not foresee before. Therefore, they should always have at least a small reserve of cash. Money demand, according to the above formula, is directly proportional to national income.
Both motives for money demand are independent of the interest rate. On the chart, the demand line looks like a straight line, located vertically.
J. Keynes singled out the third motive for keeping money - speculative. He implies that if savings are kept at home, then the owner misses out on possible profits. That is, money could be invested in less but more profitable ones. The demand formula looks like: M = Ifact. Here is Ifakt. - the level of the interest rate. The relationship between these indicators is directly proportional. Graphically, the speculative demand line is a curve with a negative slope.
Control of money supply carried out by the Central Bank in the country. This is necessary for the money to be at a stable level.
To determine the equilibrium of the money market, it is necessary to understand what determines the demand for money. The demand for real money stocks (M/P)d=L follows from the two main functions of money - being a means of circulation (means of payments) and a means of storing value (stock of value), as well as their absolute liquidity.
Therefore, the demand for money can be divided into two parts:
1) demand due to the use of money in various transactions (transactions), i.e. when paying for purchases of goods and services, which in economic theory called the transactional demand for money;
2) the demand for money as a financial asset, as a means of preserving wealth, or the speculative demand for money.
In the classical and neoclassical macroeconomic models, the demand for money is determined solely by transactional motives, and its value can be calculated either from the equation of the quantity theory of money MV=PY, (where M is the amount of money in circulation; V is the velocity of money the number of transactions is served by one currency unit; P- general level prices (price index); Y- real GNP), or from the Cambridge equation M=kPY (where M is the amount of money in circulation, k is the share of nominal income held in cash, PY is nominal income). By adopting the concept of transactional demand for money classical school, Keynes looked at this problem more broadly. He believed that in addition to planned purchases, people make unplanned ones. Knowing that such situations are possible at any time, they keep additional amounts of cash. Keynes called this demand for money prudent demand or demand for money from the precautionary motive (precautionary demand for money). Both of these types of demand for money can be combined into one category, since, ultimately, it is the demand for money for the purchase of goods and services (for transactions). It is determined by the amount of income Y and does not depend on the interest rate, therefore, the graph displays a vertical curve (P fig.3 (a)) .
The higher the income, the greater the demand for real money reserves, so the transaction demand for money can be written as Lt=hY, where Lt=(M/P) d t is the transaction demand for real money reserves, Y is real income, h is sensitivity demand for money by income (a positive coefficient showing how much the real demand for money changes with a change in the level of income per unit). The real demand for money (the demand for real money reserves), thus, is directly related to the amount of income.
However, according to Keynes, there is another type of demand for money, due to the use of money as a means of storing wealth, which Keynes called speculative or demand for money as a financial asset. In addition to money, there are other financial assets in the economy - stocks and bonds that generate income, unlike cash, which do not have a profitability. It makes sense for a person to keep money as a financial asset only when the return on all other types of financial assets is low. An alternative financial asset to money in economic theory is bonds, the income on which is interest. The higher the interest rate (i.e., the higher the yield on securities), the less a person's desire to keep money as an asset and the greater the desire to buy other financial assets. And vice versa, the lower the interest rate (i.e., the lower the yield on securities), the greater the desire to hold cash, which, although it does not generate income, has absolute liquidity (the ability to exchange at any time for any other type of asset - financial or real). Thus, the speculative demand for money depends on the rate of interest, and this dependence is inverse. The formula for speculative demand for real money reserves: La=(M/P) d a = -fR (where R is the interest rate and f is
the sensitivity of the demand for money to the interest rate or a positive coefficient showing how the real demand for money will change when the interest rate changes by one percentage point; minus sign before f means inverse relationship). The graph of speculative demand for money is shown in Fig. 3(b).
The total real demand for money can be obtained by summing up the transactional and speculative demand: L=(M/P)d=Lt+La=hY-fR, a graphic representation of which is in Fig. 3(c).
