bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

THE THEORY OF THE DEMAND FOR MONEY 117
Miller and Orr’s version (1966, 1968), contains thresholds, with people only
changing from money to bonds or vice versa at upper or lower thresholds of
money balances. Milbourne (1986) took the Miller-Orr framework and
considered within it the impact of financial innovation on monetary aggregates.
Box 5.3; The principal variations on the inventory-theoretic model of
the transactions demand for money
(i) With fixed or partly fixed transactions costs, a person does not hold securities at all
unless the interest income is greater than the transactions costs of converting money
into and out of bonds. Then, a change in interest rate may not cause any change in
the demand for money. The inverse relationship between interest rate and the demand
for money that the model seeks to demonstrate disappears at low rates of interest.
(ii) The frequency of pay periods and the timing of payments may be influenced
by institutional and technical changes (for example, the use of credit cards) and
by economic factors such as high and variable interest rates.
(iii) Only the interest rate on bonds is included in the model; but if a firm can use
an overdraft facility to obtain money, the relevant rate is the difference between
the rate charged on borrowings on overdraft and the rate paid on bonds. Again,
the demand for money depends on the relative interest rate if the model is extended
to include an interest rate or an implicit interest rate (in the form of bank services
provided below cost) on holdings of money.
(iv) The transactions demand for money may be modelled such that money holdings
are only deliberately adjusted when they reach upper or lower thresholds.
(v) Individuals can be allowed to save part of their income, acquiring interest-bearing
assets for holding long-term as well as for short-term reasons.
(vi) Once it is accepted that some people but not others make
money/bonds/money conversions with transactions balances, aggregation problems
arise. It can then be shown that almost any elasticity is possible depending
on the propensity to save and the proportion of income earned by those who do
not make any conversions.
The formal inclusion of interest rates into the precautionary demand for
money adds further to the case for an inverse relationship between interest
rate and the demand for money, without suggesting that the demand for
money function might be unstable.
5.7 Tobin's portfolio model of the demand for money
Tobin’s model (1958, 1969) can be seen as a response to the common criticisms
of the speculative demand model. It introduces a wider range of
assets including equities and real assets. Where, in his 1958 article, Tobin