The Consumer's Demand for Money: A Neoclassical Approach

Abstract

Since the appearance of the contributions of Modigliani and Brumberg (1954), and of Friedman (1957), series of writers has derived new theories of the consumption from the neoclassical, or Fisherian, analysis of intertemporal resource allocation under assumptions of everincreasing generality. According to this approach, the consumer is viewed as maximizing an intertemporal utility function, having as arguments the levels of aggregate consumption at each point in time, subject to an overall resource constraint. The solution to this maximization problem yields the time path of consumption as function of total resources and the time path of forward prices. In this capital-theoretic approach, the household stock of nonhuman wealth enters only indirectly. First, the services of real assets (for example, homes and cars) are included in consumption, and forward prices of aggregate consumption are defined to include the prices of these services rather than the prices of the assets themselves. Second, in the ModiglianiBrumberg formulation, expected labor income and nonhuman wealth (= present value of expected property income) are entered as separate arguments in the consumption function. However, neither Friedman nor Modigliani and Brumberg (nor their successors) stress the fact that the intertemporal maximization process also yields, as by-product, the time path of savings and of household nonhuman wealth (which includes stocks of financial as well as of real assets). Parallel to this work on the consumption function, Friedman and others have argued that the demand for money should also be regarded as a special topic in the theory of capital (Friedman 1956, p. 4). Money