bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

of their wealth in a more liquid form than previously. In other words, the
demand for money will increase.
Friedman’s demand for money function
Putting all this together, we arrive at Friedman’s 1970 version of his revised
quantity theory: 11
where:
THE THEORY OF THE DEMAND FOR MONEY 123
Md/P = f [Yp, w; i m, i b, i e, (1/P).dP e/dt, u]
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• P is the price level. It is included because the demand for money is a
demand for real balances and a change in P changes the real value of money
holdings. Thus, P is positively related to Md.
• Yp is permanent income, introduced as a proxy for wealth because of the
difficulties involved in measuring wealth. As in Friedman’s consumption
theory, permanent income was taken as an exponentially weighted average
of past and current levels of income. Yp is positively related to the demand
for money.
• w is non-human wealth/wealth and is negatively related to the demand for
money.
• im is the rate of return on money itself and is positively related to the
demand for money.
• ib is the rate of return on bonds, abstracting from the possibility of capital
gains and losses. It is negatively related to the demand for money.
• ie is the rate of return on equities, abstracting from the effects on equity
prices of changes in interest rates and the rate of inflation. It is negatively
related to the demand for money.
• (1/P).dPe/dt is the expected rate of inflation, included as the rate of return
on real assets. It is also negatively related to the demand for money. Note
that the demand for money is positively related to the price level, but negatively
related to the expected rate of inflation.
• u is a portmanteau symbol standing for other variables affecting the utility
attached to the services of money and also includes tastes and preferences.
It may be either negatively or positively related to the demand for
money.
The rates of return in the above equation are expected variables.
Although we have indicated the likely signs to be attached to the variables