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Monetary Economics in Globalised Financial Markets pp 91–150Cite as

Money and Credit Demand

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Classical Demand for Money Theory

The quantity theory of money, dating back to contributions made in the mid-16th century by Spanish Scholastic writers of the Salamanca School, is one of the oldest theories in economics (de Soto, 2006, p. 603). In his book The Purchasing Power of Money (1911), Fisher gave the quantity theory, as inherited from his classical and pre-classical predecessors, its modern formulation. Fisher’s version, typically termed equation of exchange or transaction approach can be stated as:

A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.

Mises, L. v. (1996), Human Action, p. 401.

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Notes

  1. 1.

    Humphrey (2004) notes that Marshall in his early manuscript Money (1871) as well as in his book Economics of Industry (coauthored with his wife in 1879) gave the quantity theory, as inherited from his classical predecessors, its distinctive Cambridge cash-balance formulation.

  2. 2.

    “Money held for each of the three purposes forms, nevertheless a single pool, which the holder is under no necessity to segregate into three water-tight compartments; for they need not be sharply divided even in his own mind, and the same sum can be held primarily for one purpose and secondarily for another”. Keynes (1973), p. 195.

  3. 3.

    Note that if a bond’s market price equals its par value, the bond’s return equals its nominal coupon. If the bond’s market price is higher (lower) than its par value, the bond’s return is lower (higher) than its nominal coupon.

  4. 4.

    See Borchert (2001), pp. 120.

  5. 5.

    If the above bond pricing formula is valid and the price of the bonds PB converges towards zero, the interest rate r tends to infinity and vice versa. Hence, the curve depicting the bond supply reveals the shape described above.

  6. 6.

    Such a specification can be interpreted as an income or wealth hypothesis. See Meltzer (1963), p. 220.

  7. 7.

    The approach to money demand derived in this section may, for instance, be also applied to professional cash managers in large firms and, in particular, to investment and commercial banks’ management of base money holdings.

  8. 8.

    The work of Estrella and Mishkin (1997) provided further support for this finding.

  9. 9.

    See in this context also the work of Aschauer and Greenwood (1983).

  10. 10.

    In the following, we focus on the US. For credit demand analyses in the euro area see, for instance, De Nederlandsche Bank (2000) which estimates national equations for bank loans to the private sector in several EU countries, Japan and the USA. Vega (1989) focuses on aggregate credit demand in Spain. Also, see Calza, Gartner, and Sousa (2001) for an analysis of the demand for bank loans to the private sector in the euro area.

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  1. Chair for Macroeconomics, University Duisburg-Essen Faculty of Economics and Business Administration, Universitätsstr. 12, 45117 Essen, Germany

    Prof.Dr Ansgar Belke

  2. Frankfurt School of Finance & Management, Sonnemannstr. 9-11, 60314 Frankfurt am Main, Germany

    Honorary Prof. Dr. Thorsten Polleit

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Belke, A., Polleit, T. (2009). Money and Credit Demand. In: Monetary Economics in Globalised Financial Markets. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-71003-5_2

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