Mon_econ_week2 - The University of Sydney Faculty of Economics and Business MONETARY ECONOMICS cfw_6 credit points ECOS3010 2009 SEMESTER 2 Tony

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The University of Sydney Faculty of Economics and Business MONETARY ECONOMICS {6 credit points} ECOS3010 — 2009: S EMESTER 2 Tony Aspromourgos WEEK II : MONEY DEMAND—KEY POINTS 2.1 micro aspects: transactions demand 2.2 the macroeconomic money demand function 2.3 the ‘collapse’ of the money demand function READING: C.A.E. Goodhart (1989) Money, Information and Uncertainty , 3 rd ed., London: Macmillan; ch. IV (‘Macro-economic analysis of the demand for money’: 82–103). 2.1 micro aspects: transactions and speculative demands It was shown in week 1 that the use of money for transactions has origins in elimination of barter and uncertainty. Hence arises the transactions demand for money (hereafter, L T ), which – at both the micro and macro levels – will be a function of the volume and value of transactions which agents wish to undertake. That is to say, in a monetary economy – in which, in order to make a purchase one must supply money – money must be held in sufficient quantity to answer those transactions. More generally (keeping in mind that money also serves as an asset: see further below), money demand (hereafter, L ) can be thought of as a function of: yield differentials between money and other assets; the transactions or ‘transfer’ costs of moving between money and other assets; uncertainty as to the future prices of assets (potential capital losses and gains); and expected future (monetary) revenues and future expenditures (requiring money as means of payment) The 4 th of these in particular, captures the core logic of L T : agents’ need for additional money balances will depend upon the expected stream of monetary expenditures into the future, relative to the agents’ expected stream of monetary receipts or revenues. Partly because of the difficulty of accurately measuring the volume of transactions, L T is commonly written as a function of aggregate income ( YP , where Y is aggregate real income, identically equal to aggregate real ouput Q , and P is the price level of output). So long as the proportion between aggregate income and the volume and value of transactions requiring monetary means of payment is unchanged through time (an important qualification; see 2.3 below), a function representing L T in relation to aggregate income will capture the relation between L and transactions. While L T is first and foremost a function of the volume and value of transactions requiring monetary means of payment, this does not mean that differential yields (the first of the 4 elements listed above) – e.g., interest rates – are irrelevant to L T . (In elementary and intermediate undergraduate macroeconomics it is common to posit L T as a function of aggregate income and
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This note was uploaded on 04/20/2010 for the course ECOF 3001 taught by Professor - during the One '09 term at University of Sydney.

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Mon_econ_week2 - The University of Sydney Faculty of Economics and Business MONETARY ECONOMICS cfw_6 credit points ECOS3010 2009 SEMESTER 2 Tony

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