This paper challenges the empirical basis for the current belief that competition forces banks to make immediate implicit-interest payments on demand deposits equal to the marginal earnings on those deposits and that this implicit return has a strong effect on the demand for money. Klein's method of defining the implicit return as a function of the money supply and of the return on an alternative asset and then adding that implicit return to a money-demand equation is likely to produce his results whether or not the world behaves as he hypothesizes.

This paper challenges the empirical basis for the current belief that competition forces banks to make immediate implicit-interest payments on demand deposits equal to the marginal earnings on those deposits and that this implicit return has a strong effect on the demand for money. Klein's method of defining the implicit return as a function of the money supply and of the return on an alternative asset and then adding that implicit return to a money-demand equation is likely to produce his results whether or not the world behaves as he hypothesizes.