Is the concept of an Equilibrium Demand for Money Meaningful? A Reply to “Has the Demand for Money been Mislaid?”

Abstract

In his latest paper, Basil Moore has clearly defined a central methodological difference between our two positions. I do, indeed, as he states, envisage economic units as having a demand in 'ultimate equilibrium' to hold some proportion of their total wealth portfolios in money balances, the proportion depending on [various well-known factors]. Moore argues that the concept of equilibrium is inadmissible in a monetary economy, since if we are in a certainty-equivalent world, we will not need money balances at all, while if there is uncertainty and changing expectations, you cannot ever reach afull equilibrium. While I accept that there is no clear role formoney in a certainty-equivalent Arrow-Debreu model, it does not seem to me that this prevents concepts of (partial) equilibrium, or balance, from being useful. Let me try one such thought experiment. The Central Bank decides, exogenously, to lower interest rates (because the stochastic error term in its reaction function shifts). In consequence, my aunt decides to borrow $10,000 to give me, her favorite nephew, the proceeds. Clearly, the increase in the supply of money is not independent of her demand function for loans, but the immediate cause of her decision was an exogenous policy change by the authorities. Why, then, is it illegitimate and misleading to analyze the effects of an increase in the supply of credit money, ceteris paribus? Is Moore arguing that there is no such thing as exogenous monetary policy decisions, or that they have no effect on the resulting volume of credit and money balances outstanding? Moore is, of course, absolutely correct that I will accept $10,000, or $1, or $100,000 from my aunt (kind aunt), but I do notnecessarily want