supply (especially currency) is held in forms that cannot pay interest in a pecuniary or nonpecuniary
form. See, for example, Milton Friedman, Why a Surge of Inflation Is Likely Next Year,
September 1, 1983. p. 24.
566
PA R T V I I
Monetary Theory
Therefore, Friedman s money demand function is essentially one in which per-
manent income is the primary determinant of money demand, and his money
demand equation can be approximated by
(7)
In Friedman s view, the demand for money is insensitive to interest rates
not
because he viewed the demand for money as insensitive to changes in the incen-
tives for holding other assets relative to money but rather because changes in
interest rates should have little effect on these incentive terms in the money
demand function. The incentive terms remain relatively constant because any rise
in the expected returns on other assets as a result of the rise in interest rates would
be matched by a rise in the expected return on money.
The second issue Friedman stressed is the stability of the demand for money
function. In contrast to Keynes, Friedman suggested that random fluctuations in
the demand for money are small and that the demand for money can be predicted
accurately by the money demand function. When combined with his view that the
demand for money is insensitive to changes in interest rates, this means that veloc-
ity is highly predictable. We can see this by writing down the velocity that is
implied by the money demand equation (Equation 7):
(8)
Because the relationship between
Y
and
Y
p
is usually quite predictable, a stable
money demand function (one that does not undergo pronounced shifts so that it
predicts the demand for money accurately) implies that velocity is predictable as
well. If we can predict what velocity will be in the next period, a change in the
quantity of money will produce a predictable change in aggregate spending. Even
though velocity is no longer assumed to be constant, the money supply continues
to be the primary determinant of nominal income as in the quantity theory of
money. Therefore, Friedman s theory of money demand is indeed a restatement
of the quantity theory because it leads to the same conclusion about the impor-
tance of money to aggregate spending.
You may recall that we said that the Keynesian liquidity preference function
(in which interest rates are an important determinant of the demand for money)
can explain the procyclical movement of velocity that we find in the data. Can
Friedman s money demand formulation explain this procyclical velocity phenom-
enon as well?
The key clue to answering this question is the presence of permanent income
rather than measured income in the money demand function. What happens to
permanent income in a business cycle expansion? Because much of the increase
in income will be transitory, permanent income rises much less than income.
Friedman s money demand function then indicates that the demand for money rises
only a small amount relative to the rise in measured income, and as Equation 8
indicates, velocity rises. Similarly, in a recession, the demand for money falls less
than income because the decline in permanent income is small relative to income,
and velocity falls. In this way we have the procyclical movement in velocity.
To summarize, Friedman s theory of the demand for money used a similar
approach to that of Keynes and the earlier Cambridge economists but did not
go into detail about the motives for holding money. Instead, Friedman made
use of the theory of asset demand to indicate that the demand for money will
V
=
Y
f
(
Y
p
)
M
d
P
=
f
(
Y
p
)
be a function of permanent income and the expected returns on alternative
assets relative to the expected return on money. There are two major differ-
ences between Friedman s theory and Keynes s. Friedman believed that
changes in interest rates have little effect on the expected returns on other
assets relative to money. Thus, in contrast to Keynes, he viewed the demand for
money as insensitive to interest rates. In addition, he differed from Keynes in
stressing that the money demand function does not undergo substantial shifts
and so is stable. These two differences also indicate that velocity is predictable,
yielding a quantity theory conclusion that money is the primary determinant of
aggregate spending. The conclusion that money is the primary determinant of
aggregate spending was the basis of monetarism, the view that the money supply
is the primary source of movements in the price level and aggregate output.
Do'stlaringiz bilan baham: 
