Determinants of the Demand for Money
AMONG the behavior equations which enter ,I -into any economic model, the consumption function and the demand for money functions are of key importance. Originally, the consumption function was said to have a negative second derivative. This claim was based on a fundamental psychological law, upon which we are entitled to depend with great confidence . . . from the detailed facts of experience. . . ) 1 The detailed facts referred to by Keynes were all based on cross-sectional studies of the income-consumption relationship. Only much later, more extensive analyses of time series showing the relationship between consumption and income indicated that, over time, the second derivative of the consumption function is zero or close to it. This forced a revision of economic analysis employing the consumption function.2 In the case of the money market the situation is reversed. We have innumerable studies analyzing the demand for money by the use of time series; we have but one study relating the demand for money to its determinants on the basis of cross-sectional data. Yet, if the history of the consumption function is any guide, our understanding of the demand for money is likely to rest on shaky foundations as long as it is based on the analysis of only one type of data. In this paper I explore the determinants of the demand for money by the use of crosssectional data. Except for a minor digression dealing with the British demand for money as reflected in cross-sectional data, I deal exclusively with the demand for money by the population of Czechoslovakia in the fall of 1945. The country and the period have been selected, not because either would be of independent intrinsic interest to the profession, but because of the unique nature of the data. It is hoped that my exploration of these data will yield valuable insights into the determinants of the demand for money which can then be profitably employed in the utilization and interpretation of other empirical studies into the nature of the demand for money.
- DOI
- 10.2307/1927926
- Volume
- 45 (4)
- Pages
- 419
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