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Friedman Modern QT

Friedman's modern quantity theory from 1956 held that: 1) The demand for money is influenced by the same factors as demand for other assets, such as wealth and expected returns on other assets relative to money. 2) Even though velocity is no longer constant, changes in the money supply will still be the primary determinant of nominal incomes according to the quantity theory. 3) In contrast to Keynesian theories, Friedman's theory saw income and velocity as moving together over the business cycle rather than interest rates and velocity.

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Appan Kandala Vasudevachary
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2K views5 pages

Friedman Modern QT

Friedman's modern quantity theory from 1956 held that: 1) The demand for money is influenced by the same factors as demand for other assets, such as wealth and expected returns on other assets relative to money. 2) Even though velocity is no longer constant, changes in the money supply will still be the primary determinant of nominal incomes according to the quantity theory. 3) In contrast to Keynesian theories, Friedman's theory saw income and velocity as moving together over the business cycle rather than interest rates and velocity.

Uploaded by

Appan Kandala Vasudevachary
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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TheDemand

forMoney

Friedmans Modern Quantity Theory

(1956)

Thedemandformoneymustbeinfluencedbythe
samefactorsthatinfluencethedemandfroany
asset.
Thedemandformoneythereforeshouldbea
functionoftheresourcesavailabletoindividuals
(theirwealth)andtheexpectedreturnsonother
assetsrelativetotheexpectedreturnonmoney.

2004 Pearson Addison-Wesley. All rights reserved

22-2

Friedmans Modern Quantity Theory


Theoryofassetdemand:Mdfunctionofwealth(YP)andrelativeReofother
assets
Md
P

=f(YP,rbrm,rerm,erm)
+

DifferencesfromKeynesianTheories
1. Otherassetsbesidesmoneyandbonds:equitiesandrealgoods
2. RealgoodsasalternativeassettomoneyimpliesMhasdirecteffects
onspending
3. rmnotconstant:rb,rm,rbrmunchanged,soMdunchanged:i.e.,
interestrateshavelittleeffectonMd
4. Mdisastablefunction
Implication of 3:
Md
Y
= f(YP) V =
P
f(YP)
Since relationship of Y and YP predictable, 4 implies V is predictable: Get Qtheory view that change in M leads to predictable changes in nominal income,

22-3

Friedmans Modern Quantity Theory


Eventhoughvelocityisnolongerassumedtobe
constant,themoneysupplycontinuestobethe
primarydeterminantofnominalincomesinthe
quantitytheoryofmoney.
InKeynesianliquiditypreferencefunction,iandV
areprocyclical,whileinFriedmansquantity
theory,income(Y)andVareprocyclical.

2004 Pearson Addison-Wesley. All rights reserved

22-4

Empirical Evidence on Money Demand


InterestSensitivityofMoneyDemand
Issensitive,butnoliquiditytrap
StabilityofMoneyDemand
1. M1demandstabletill1973,unstableafter
2. Mostlikelysourceofinstabilityisfinancial
innovation
3. Castdoubtsonmoneytargets

2004 Pearson Addison-Wesley. All rights reserved

22-5

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