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Economic Review

Jan/Feb, 1988

Theoretical Analysis of the Demand for Money

Marvin Goodfriend and Bennett T. McCallum

The paper summarizes current mainstream views concerning the theory of money demand. A utility maximizing household chooses to hold money because it facilitates transactions, allowing it to economize on shopping time. Two types of implied money demand functions are derived: a "proper" demand function with arguments exogenous to the household and a conventional "portfolio balance" relationship. The historical evolution of ideas pertaining to money demand is reviewed. A final section considers ongoing controversies concerning the role of uncertainty, the use of overlapping generations and cash-in-advance models, and the interpretation of empirical results suggestive of extremely slow portfolio adjustment.

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