The Demand For Money

The classical economists emphasized the transactions motive for holding money balances in their theory of the demand for money and emerged with a view in which money balances demanded bear a stable and proportionate relationship to income.

Keynes added precautionary and speculative motives for holding money balances and produced a theory in which money balances demanded are highly sensitive to interest and the function relating money balance demanded to interest and income is volatile.

Current approaches deemphasize the speculative motive and imply a smaller interest sensitivity of money demand and a more stable money demand function. Emphasis is placed on the interest rate as the opportunity cost of holding money balances, a cost which enters into the determination of optimum transactions and precautionary money balances or which is compared to the utility or productivity of a dollar of money balances at the margin. 

Statistical investigations confirm both real income and the interest rate determinants of real money balances demanded, but document neither the substantial interest sensitivity nor the substantial volatility Keynes and the early Keynesians perceived in the money demand function.