In keynesian economics, a need for money for investment purposes. The speculative motive for holding money arises because. Transanction motive, precaustionary motive and the speculative motive. That is, speculative demand for money is the desire to have. For simplicity keynes assumed that perpetual bonds are the only non money financial asset in the economy, which compete with money in the asset portfolio of the public. Speculative motive some people hold money for the speculation purpose.
A speculator always maintains a cash balance to get the speculation benefits and outcomes. In keynesian economics an investor can hold money or bonds. That is, speculative demand for money is the desire to have money for transactions other than those necessary for living. Speculative demand for money is inversely related to the rate of interest, i. Meaning of demand for money money is the set of assets in an economy that people regularly use to buy goods and services from other people. The net return on bonds is the sum of the interest payments and the capital gains or losses from their varying market value. If people desire to hold money,there is a demand for money. Will this demand also be affected by present interest rates. A rise in interest rates causes aftermarket bond prices to fall, and that implies a capital loss from holding bonds. M2 is money demand caused by the speculative motive, and is a decreasing. The second type of money demand arises by considering the opportunity cost of holding money. Theories of money demand are briefly covered in section 2. One cannot sort through someones checking account and locate which funds are held for transactions and which funds are there because the owner of the. Together they provide the basis for a theory of the demand for money.
Keynes modeled money demand as the demand for the real quantity of money real balances mp. M 2 l 2 r where, l 2 is the speculative demand for money, and r is the rate of interest. The speculative demand for money is downward sloping typical for a demand curve and the quantity of money is measured on the horizontal axis also typical but the vertical axis doesnt measure price. For keynes, all assets other than money are categorised as bonds. According to john maynard keynes, speculative demand is one of the three desires.
Keynes argued that expectations about future bond prices tend to be sticky. The demand for money to take advantage of an investment opportunity. The speculative or asset or liquidity preference demand for money is for securing profit from knowing better than the market what the future will bring forth. Demand for money overview, types, speculative reasons. In contrast to the original keynesian approach this model proves the transaction demand for money to be dependent on the interest rate. The objective of the paper is to examine the and stability of determinants the money demand function for png. In general, an investor who chooses to hold money instead of financial instruments, such as bonds, is giving up the return heshe can earn. Keeping all money invested doesnt seem attractive all the time. The total demand for money d m is the sum of the three demands, transaction, precautionary, and speculative, and is stated with the equation. In this case, money is viewed as an asset class like any other with a rate of return and an opportunity cost of holding it. Demand for money yasset demand ykeyness speculative motive.
The demand for money 731 thebaumoltobinmodel section 2. Maintaining a fair amount of liquidity in ones portfolio is one of the top priorities for an investor. If it is felt that the interest rate is going to rise meaning the price of bonds will fall the investor will hold money until the fall in the price of bonds is realized. Pdf keynes answered to critics of the general theory, in 1937, that they. Where, l 2 is the speculative demand for money, and. The classical economists did not explicitly formulate demand for money. The demand for money balances social sci libretexts. Speculative demand includes risk capital for securities. That is, in a period of high interest rate, people hold less cash and probably make more savings. Investors make capital gains by speculating in securities or bonds.
The speculative demand for money usually focuses on factor3. The speculative demand for money thus depends on expectations about future changes in asset prices. So under the speculative motive, money demand is negatively related to the interest rate. The higher the rate of interest, the lower the speculative demand for money and the lower the rate of interest, the higher the speculative demand for money. The main drawback of keynes speculative demand for money is that it visualises that people hold their assets in either all money or all bonds. A second thing that causes this negative relationship is the speculative demand for money. It explains why the public may hold surplus cash over and above that demanded due to the other two motives in the face of interest earning bonds and other financial assets. The speculative demand for money is a function of the rate of interest. Speculative demand for money and its relation with rate of. The speculative demand for money s dm is stated by the function s dm f r where y is the rate of interest muley, n.
Speculative demand is a term from keynesian economics which describes the desire to have money for the purpose of investing in assets. The demand for money 731 thebaumoltobinmodel section 2 the baumoltobin model ise kbtu a. The speculative demand for money depends on interest rate and views money and bonds as alternative assets where bond holding depends on the rate of. It can refer to the demand for money narrowly defined as m1 directly spendable holdings, or for money in the broader sense of m2 or m3. People hold a part of their income for speculative purpose. A stable money demand function is necessary for monetary policy and a useful instrument for macroeconomic policy. James tobins portfolio approach to speculative demand for. Demand for money demand for money demand free 30day. Kyenesian approach the keynesian money demand function can be expressed as md ly,r. M1 is money demand caused by the transaction motive and the precautionary motive, and is an increasing function of income y. Keynes argues that people believe that there is a normal value of interest rate. Therefore, curve of speculative demand for money is downward sloping to the right as shown in the following fig. Keynes argued that people demand money for three motives, namely, transaction, precaution and speculation.
An additional source of the demand for money is buffer stock, which arises because of lags in the adjustment of income, commodities and bonds. Recall that holding money is just one of many ways to hold value or wealth. The speculative or asset demand for money is the demand for highly liquid financial assets domestic money or foreign currency that is not dictated by real transactions such as trade or consumption expenditure. Speculative demand arises from the perception that money is optimally part of a portfolio of assets being held as investments overview. Smooth curve which slopes downward from left to right. General theory, keyness speculative demand for money is the liquidity preference or demand for shortterm securities of rentiers financial. Keynes 1936 introduced three reasons or motives for holding money. At low interest rates, people are concerned that interest rates may rise and shrink the value of their interestbearing assets.
According to keynes, the higher the rate of interest, the lower the speculative demand for money, and lower the rate of interest, the higher the speculative demand for money. Individuals and businessmen having funds, after keeping enough for transactions and precautionary purposes, like to make a speculative gain by. Precautionary demand is the demand for highly liquid financial assets domestic money or foreign currency arising from preparedness for emergency expenditures overview. Demand for money one of the central questions in monetary theory is the stability of money demand function, i. Demand for money meaning of demand for money demand for money can be defined as the quantity of money demanded for different purposes by the people at any p. Speculative demand for money arises because of the store of value function of money. Three variables that may explain the size of these holdings are.
Tobin further ela borated also the speculative demand for money. Speculative demand for money financial definition of. Wealth can be held stored in the form of landed property, bonds, money, bullion, etc. It is a tactic used by investors traders to hold cash so as to make the best use of any investment opportunity that arises later on. Real money holdings, the ratio of nominal money holdings to the price level, mp, are denoted by m. The speculative demand for money was given by keynes. Demand for money tobins further refinement ypeople not only care about the return on different assets, but also the riskiness of the return. The speculative or asset demand for money is the demand for highly liquid financial assets domestic money or foreign currency that is not dictated by real. The speculative motive for money demand is particularly related to changes in the interest rate.
Speculative motive transaction motive day today transactions are done by individuals as well as firms. Monetarism monetary theory and policy economics online. Dec 12, 2020 keynes has postulated three motives behind the demand for money. Apr 17, 2015 so money is more attractive than bonds when interest rates are low. The speculative motive reflects peoples desire to hold cash in order to be equipped to exploit any attractive investment. The demand for money for this purpose is completely interest inelastic. The speculative demand for money, then, simply relates to component of the money demand related to interest rate effects. One of the most appealing hypotheses of the keynesian literature that the demand for money is generally related to speculation in the bond markethas generally. It can refer to the demand for money narrowly defined as m1 directly spendable holdings, or for money in the broader sense of m2 or m3 money in the sense of m1 is dominated as a store of value even a temporary one by interest. This is because people want to take advantage of changes in the money market.
Keynes divided the money demand motive into a trading motive, a precautionary motive and a speculative motive. M 2 l 2 r where, l 2 is the speculative demand for money, and. Laidler 1977 points out that keynes did not regard the demand for money arising from the transactions and precautionary motives as technically fixed in their relationships with the level of income and. The demand for speculative cash balances is inversely related to the rate of interest. Speculative demand for money in keynesian economics, a need for money for investment purposes. Wealth can be held stored in the form of landed property, bonds. The liquidity trap what happens when there is a change in the demand for money. People choose to hold money because of its function as a medium of exchange and store of value. Empirical analysis of money demand function in nigeria. As usual, labeling the axes incorrectly is a pitfall to avoid when graphing the speculative demand for money.
Generally, holding money provides you with a zero rate of return with the added prospect of high inflation lowering its value. The answer to this question has a lot to do with the e. Geometrically, it is a smooth curve which slopes downward from left to right. The interest rate is the price of holding money in this case. On the other hand if time gap is more a person will demand more money to carry on his daily transactions. In the general theory, keynes distinguishes between three motives for holding cash i the transactionsmotive, i. The primary result of the keynesian speculative theory is that there is a negative relationship between money demand and the rate of interest. Keynes theory of demand for money explained with diagram.
In monetary economics, the demand for money is the desired holding of financial assets in the form of money. It can be expressed algebraically as ls f r, where ls is the speculative demand for money and r is the rate of interest. The basic inventory analysis of the transactions demand for money baumols 1952 version of the inventory analysis of the transactions demand for money will be presented here. In this theory, he argued that demand for money is a choice between holding. The demand for money we have previously learnt that the demand for real balances could be divided into a speculative demand component, inversely related to the interest rate, and a transactions demand component, positively related to income and inversely related to the interest rate. We can have the communitys total demand for money or liquidity preference schedule by adding the. Algebraically, keynes expressed the speculative demand for money as. An individual person has to buy so many things during a day. There are several cases in which money is used as a speculative instrument. His other two needs regarding demand for money are precautionary demand and transactions demand. In economic theory, specifically keynesian economics, precautionary demand is one of the determinants of demand for money and credit, the others being transactions demand and speculative demand.
Speculation is the act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial. The precautionary demand for money is the act of holding real balances of money for use in a contingency. Speculative demand for money financial definition of speculative. M 2 l 2 r where r stands for the rate of interest, l 2 for demand function for speculative motive. According to keynes, it is not rational to hold idle cash instead of holding a bond if the rate of interest is expected to rise in the future. Keynes explained the asset motive through what he termed speculative demand. T he demand for speculative balances, on the other hand is sometimes referred to as the demand for idle balances. The money is held to take advantage of speculative opportunities or for. Key takeaways anytime the gross domestic product gdp rises, there will be a demand for more money to make the transactions necessary to buy the extra gdp. What are the three types of motives for holding money.
For the sake of simplicity, all forms of assets except money may be clubbed in a single category called bonds. Speculative demand is one of keynes three motives for demanding money. The speculative demand for money arises from the speculative motive for holding money. Speculator always searches the project to invest money temporarily so that makes the huge profit immediately. Economic and social effects of financial liberalization. Now, if the total liquid money is denoted by m, the transactions plus precautionary motives by m 1 and the speculative motive by m 2, then. Money demand depends on expected future interest rates. Keynes referred to the speculative demand for money as the money held in response to concern that bond prices and the prices of other financial assets might change. Thus, people may hold money to avoid the loss from bonds. Speculative demand is the holding of real balances for the purpose of avoiding capital loss from holding bonds or stocks.
The latter arises from the variability of interest rates in the market and uncertainty about them. Algebraically, the speculative demand for money is. It is therefore essential that policy makers are mindful of the properties of the money demand function and its linkage to the rest of. The money is held to take advantage of speculative opportunities or for coveringoffsetting risks in other assets or the economy. We said that speculative demand also depends on the conditions in other markets, such as the bond market and the expectations of returns in those markets. According to keynes theory, demand for money for transaction. For this purpose people want to keep some cash money with them. Modern quantity theory of money friedman inherited keynes viewpoint which consider that monetary demand is for assets, but he expanded the form of wealth to a wider range including stock s, bonds, and real assets. While explaining the speculative demand for money, keynesdivided the assets that can be used to store wealth in two forms. The model as a whole is based on the fact that income, which a subject retains for a period usually. Alternative opportunities include holding wealth in the form of savings deposits, certificate of deposits, mutual funds, stock, or even real estate. Money held for speculative reasons is also known as the portfolio demand for money. Apr 03, 2021 the demand for money to take advantage of an investment opportunity. If people expect to earn a lower return holding money, money demand will increase.
If the current interest rate is low, people will expect the interest rate to rise and bond price to fallin the future. James tobins portfolio approach to speculative demand for money. Solved why is keyness analysis of the speculative demand. The speculative motive giving rise to the speculative demand for money is the most important contribution keynes made to the theory of the demand for money. It seems likely that if bond prices are high, financial investors will become concerned that bond prices might fall. Each wealth holder is presented with the possibility of buying debt or. Speculative demand for money and its relation with rate of interest. According to john maynard keynes, speculative demand is one of the three desires governing demand for money, the others being precautionary demand and transactions demand.
1159 1022 1217 1718 1703 282 657 1440 731 1358 422 1651 260 900 1122 1159 960 548 19 381 995