Portfolio Adjustments and the Demand for Money in the Face of Expected Inflation: An Uncertainties Perspective

Abstract

Households and finns are likely to react to expected inflation by adjusting their asset portfolios: changing their holdings of real assets, financial equities, bonds, and other longand short-term debt assets, non-interest-earning money, and debt liabilities. In what direction will each of these demands change? For example, will a rise in expected inflation increase or decrease the demand for money? People hold money partly in order to reduce the uncertainties of their portfolios, as Keynes suggested (1936, particularly chapters 13, 15).1 But although the speculative demand for money is now a well-known concept, it has had too little impact on thinking about the effect of expected inflation on the demand for money, or on the demand for shortand long-term debt assets. The conventional assumption is that households and firns react