Money Demand and the Effects of Fiscal Policies

Deskripsi

challenge the conventional use of Gross National Product (GNP) as the scale variable in money demand functions, arguing that consumer expenditure (C) is empirically superior. Their analysis draws on portfolio and transactions theories, noting that households—the primary holders of money (64% of M1, 90% of M2)—generate disproportionate demand for money relative to other GDP components. Empirical tests (1960–1984) reveal that velocity (C/M) is more stable than traditional velocity (Y/M), and money demand equations using C yield smaller errors and better forecasts, especially for M1.

The paper concludes by questioning Keynesian orthodoxy, including the paradox of thrift and automatic stabilizers, while highlighting implications for monetary targeting.