The Keynesian Demand-for-Money Function: Another Look and Some Additional Evidence

Abstract

THE PREBSENT PAPER attempts to define the properties of a demand-for-money function along the lines originally suggested by Keynes and to derive estimates for the parameters of this function.* Previous empirical studies on the subject of the demand for money have made use of the doublelogarithmic transformation, which in exponential form can be expressed as follows: M = e6YbRCWd, where M is the total quantity of money demanded, and Y, R, and W are such variables as income, the interest rate, and wealth. The exponents a, b, c, and d, are the elasticities of the demand for money with respect to each independent variable. Other studies, in contrast, have followed the method of dividing the total demand for money into its main components such as idle and active balances, i.e., M = M1 + M2, with M representing active money balances that arise out of transactions' needs and are related to the level of income and M2 representing idle balances that stem from the speculative motive and are dependent upon the rate of interest. We believe that an evaluation of the Keynesian demand-for-money function based on previous studies presents three general problems: (a) certain formulations do not have the same properties as those associated with the Keynesian