Is the Speculative or the Precautionary Demand for Money More Important in Real World Capital Markets?

Fixing the Economists

liquidity

In Keynes’ General Theory is is famously stated that the demand for money relies on three distinct functions. These are: the transactions demand for money; the precautionary demand for money; and the speculative demand for money. Or, more formally:

M = Mt + Mp + Ms

In that work Keynes — as he regularly did in his monetary theories — laid rather a lot of emphasis on the speculative demand for money and not a great deal of emphasis on the precautionary demand for money. In chapter 13 of his General Theory he wrote,

It may illustrate the argument to point out that, if the liquidity-preferences due to the transactions-motive and the precautionary-motive are assumed to absorb a quantity of cash which is not very sensitive to changes in the rate of interest as such and apart from its reactions on the level of income, so that the total quantity…

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About Damian Merciar
Damian Merciar is Managing Director of Merciar Business Consulting, http://www.merciar.com, a niche business economics consultancy founded in 1998. He has over twenty years experience in the areas of commercial Business Strategy. He is experienced in the transition environments of nationalized to private sector state utilities and the senior practice of commercial management, advisorial consultancy, and implementation. He has carried out policy advisory work for government ministries and been an adviser to institutional bodies proposing changes to government. He holds an MSc Economics from the University of Surrey’s leading Economics department and an MBA from the University of Kent. Also attending the leading University in the Middle East, studying International Relations and Language, for which he won a competitive international scholarship, and has a BA (Hons) in Economic History and Political Economy from the University of Portsmouth. He is currently based in London.

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