Some Problems of Money Demand
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THE CURRENT ECONOMIC upturn has been characterized by unusually low rates of money growth relative to the increase in nominal gross national product. Even more surprising, the unusual rise in velocity has occurred while short-term interest rates have remained largely unchanged or even fallen slightly (see table 1). This development contradicts much of the supposed knowledge about the public's demand for money and its determinants. The present shortfall of money demand from its expected value has important consequences for current monetary policy and the increased uncertainty about the demand for money in the future has implications for the conduct of policy generally.' The first section of this paper describes the magnitude of the problem. The second section briefly reviews a simple version of the theory of money demand in order to provide a framework for examining causes of the problem. It lists some potential inadequacies of the theory and data and then focuses on current developments that are not embodied in the simple theory and that might help explain recent money demand. The next section presents some empirical tests, and the final section offers conclusions.