The Precautionary Buffer Stock Model of the Demand for Money and Speculative Liquidity Preference
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Since the work of John Maynard Keynes which distinguished between the different motives for holding liquid assets there have been many attempts to capture the essence of his motives — this chapter focuses on modelling the precautionary and speculative motives. There are two strands to monetary theory which this chapter draws together; the first is the work of Tobin (1958) who considered the response of an individual that maximises the return of a portfolio of assets subject to a dislike for risk.1 The second is the buffer stock precautionary model of Cuthbertson and Taylor (1987a), based on Miller and Orr (1966, 1968), which suggests that the precautionary demand for money is based on the desire to minimise costs of adjustment of balances and costs of deviating from a ‘desired’ target level of money balances.
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