erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Demand for Money and Risk

Jose Martins Barata (Technical University of Lisbon, Portugal)
Paulo Eurico Variz (Technical University of Lisbon, Portugal)

Abstract

Tobin’s seminal article derived the behaviour of money demand due to the speculative motive for liquidity preferences, pioneering the idea of an existing financial investment motive behind holding money, which is supposed to be included in the investors’ portfolios as a riskless financial asset. His objective was to find a consistent explanation for the liquidity preference function of Keynes (L₂). Tobin moved to conclude that every risk-averse rational individual optimizing his expected utility always invests a part of his wealth in money and concluded that the Keynesian L₂ was consistent. However, he did not derive a formula for money demand and id not find its elasticity. This paper generalizes money demand on the basis of the theory of financial investments, derives overall money demand, and examines the problem of its elasticity, so as to recover the issue of liquidity trap existence. We discuss the similarity of this demand function with Keynes’, as well as its robustness (and that of the underlying microeconomic model) to alternative scale factors, to the consideration that money yields a certain return, and to alternative concepts of uncertainty/risk, sheding some light on the Post Keynesian discussion on this matter.

Economic Research Center
Middle East Technical University
06531 Ankara Turkey
Phone: + 90 312 210 3044, 210 2003
Fax: +90 312 210 1244
e-mail: metuerc@metu.edu.tr