bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

126 MONETARY ECONOMICS
5.9 Microeconomic transactions models of the demand for
money
Since Friedman’s Revised Quantity Theory, theoretical work on the demand
for money has been far outweighed by the huge number of empirical studies.
We have already considered the post-Keynesian advocacy of endogenous
money and mentioned the buffer stock approach to the demand for
money in Chapter 4. Since the buffer stock approach is best seen as an
attempt to find a theoretical justification for empirical results, we return to
it in Chapter 6. Apart from these, the only developments have been microeconomic
transactions models that have grown from attempts to justify the
holding of money for transactions purposes within general equilibrium
models. The most prominent models of this kind (McCallum, 1989;
McCallum and Goodfriend, 1992; Dowd, 1990) analyse the demand for
money in terms of the shopping time saved in carrying out transactions
through the use of money (as distinct from barter). Shopping time saved has
value since it can be used to earn income or to obtain utility from other uses.
In McCallum and Goodfriend’s (1992) version, an agent maximizes
present and future utility from the consumption of goods and leisure. He
currently holds a stock of bonds and money (the purchasing power of which
is eroded by expected inflation); and the economy provides a stream of
opportunities for the earning of further income by selling labour services
and for re-arranging consumption over time through a capital market in
which bonds may be bought and sold. Consumption goods can be obtained
in exchange for income only by shopping for them.
The amount of time required for shopping increases with the quantity of
consumption goods bought, but is negatively related to the size of real
money balances carried on shopping trips. It follows that a decision to hold
more money now, ceteris paribus, reduces shopping time, leaving more
time for current leisure and/or increased labour supply and future real
income. Equations can be derived from the model for current and future
demands for consumption, leisure, bond holding, money holding, and the
supply of labour.
These are highly theoretical models that were principally intended to
overcome criticisms that general equilibrium theory did not provide a role
in the economy for money. The demand for money function that can be
derived from them can be compared with Friedman’s. In McCallum and
Goodfriend, the demand for money is related to inherited assets; expected
unearned income (non-human wealth); current and expected future wage
rates (human wealth); interest rates and inflation rates. Since decisions