Comment on Barry Friedman's Demand for Money

2011-07-10T00:00:00Z (GMT) by Allan Meltzer

Recently many economists have argued that money is a buffer stock held solely for transactions. On this interpretation there can be deviations between desired and actual money balances because of lags in adjustment to changes in the desired volume of transactions or changes in interest rates. But each of the writers in this tradition denies the existence of an asset demand for money and for this reason, denies that money is a part of the desired portfolio of assets and that wealth influences the demand for real money balances. In defense of this mew, many cite the conclusions of James Tobin's justly famous paper on liquidity preference, namely: In a world with close substitutes for money such as time deposits, money is "dominated" by other assets that are said to have all of the properties of money and to have the additional property or advantage of bearing interest. Hence there is no reason for economic units to hold money as an asset, according to this analysis.