Microfoundations and the Demand for Money

Abstract

The reader should note that I write this piece in a style that aims to be accessible to that much neglected representative agent, ‘the woman on the Eurostar train’. Hence, unlike the ‘man on the Clapham Omnibus’ I assume my intrepid traveller has reasonable knowledge of monetary economics and econometrics but not of the details of the demand for money. Space constraints force me to indulge in a certain amount of poetic licence, but I hope this results in poetic justice. There have been many wars fought on this particular battlefield, some with almost religious zeal. On the theoretical side of the debate we sometimes have the equivalent of religious fundamentalists be they Muslims, Jews, Christians etc. who would dismiss almost any ‘evidence’, unless it were associated with a ‘strong microtheoretic’ basis as laid down in the Koran, Talmud or Bible. The empirical side encompasses, agnostics, atheists as well as ‘Born Again Econometricians’, Pure theorists inhabit the sunlit uplands, while applied economists and policymakers flounder in the muddy plain below, occasionally gaining solace from their copy of ‘Zen and the Art of Motorcycle Maintenance.’