bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

Thus, let
giving us:
and:
THE THEORY OF THE DEMAND FOR MONEY 103
w= cT
Md = kPcT
...5.8
Md1/ ck = PT
With c and k both constant, we can define Fisher’s V as the inverse of ck
and write:
Md. V = PT
...5.10
Finally, we assume the money market to be in equilibrium with Md =
Ms. Thus,
MV = PT
...5.11
The two versions of the Quantity Theory appear very similar. In both, as
long as money is exogenous, increases in the price level result from an
excess supply of money. The demand for money function in the Cambridge
version is stably related to w and, hence, to T.
Nonetheless, there are important differences between the Quantity
Theory and the Cambridge approach. 4 Firstly, the Cambridge approach
makes use of marginal analysis and extends the general neo-classical model
to the money market. It is, thus, a forerunner of the later portfolio models
of Milton Friedman and James Tobin dealt with below.
Secondly, the factors influencing V in the Fisher version are only a subset
of those influencing k in the Cambridge version. The inclusion of the
opportunity cost in the Cambridge version makes k potentially more subject
to short-term change than is V. The possibility at least exists that people
might choose to hold money for purposes other than engaging in the
exchange of goods and services. Crucially, it gave a potential role to the rate
of interest. Keynes, as early as 1923 in A Tract on Monetary Reform (JMK
Vol IV), showed how the incorporation of inflationary expectations could
produce changes in the price level, in the absence of changes in the money
stock. In The Treatise on Money (1930 and JMK Vols V and VI), he argued
that changing expectations regarding security prices might cause changes in
nominal interest rates. In The Treatise, his price equation did not include
the money stock at all. The opportunity cost of holding money was assuming
greater importance.
5.4 The General Theory and the demand for money
...5.7
...5.9
Keynes’s (1936) theory of the demand for money as treated in IS/LM analysis
is widely known. It is a part of his general model, which deals with the