Theories of money demand
- Quantity theory: in Fisher's equation MV=PY, with stable velocity, money is demanded in proportion to transactions; the Cambridge version is Md=kPY.
- Keynes's liquidity preference: transactions and precautionary demand depend on income, speculative demand on the interest rate, so higher rates reduce money demand.
- Baumol-Tobin inventory model: even transactions demand responds to interest rates.
- Friedman's restatement: money is one asset among many, with demand a stable function of permanent income.
Bank of Korea aggregates
- M1 (narrow money): currency, demand deposits and transferable savings deposits
- M2 (broad money): M1 plus time deposits and savings under two years, market instruments, investment funds and financial bonds (excluding maturities of two years or more)
- Lf: M2 plus longer-term deposits and life insurance reserves
- L: Lf plus government and corporate bonds, commercial paper and similar
Policy relevance
Stable money demand let many central banks target money growth in the 1970s and 1980s. Financial innovation made demand unstable, so the Bank of Korea moved to inflation targeting in 1998 and now steers the base rate, using aggregates as reference indicators.
References
- Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.
- Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan.
- Friedman, M. (1956). The quantity theory of money: A restatement. In M. Friedman (Ed.), Studies in the Quantity Theory of Money (pp. 3-21). University of Chicago Press.
- 한국은행. (2018). 『알기 쉬운 경제지표해설』. 한국은행.