First, trading motivation: in order to pay for daily transactions, people must hold money;
Second, preventive motivation: also known as cautious motivation, holding money to deal with some sudden emergency payments;
3. Speculation motivation: Due to the uncertainty of future interest rates, people hold money in order to avoid capital loss or increase capital gains and adjust the asset structure in time.
Among the three motives of money demand, the money demand caused by transaction motivation and cautious motivation is related to the transaction of goods and services, so it is called transactional money demand (L 1). The money demand generated by speculative motives is mainly used for speculation in financial markets, so it is called speculative money demand (L2).
The total demand for money (L) is equal to the sum of trading demand (L 1) and speculative demand (L2). For transactional demand, Keith thinks it is related to the goods and services to be traded. If national income (y) is used to represent this quantity, then the transaction demand of money is a function of national income, which is expressed as L 1 = L 1 (Y). And the more income, the more trading demand, so this function is the increasing function of income. For speculative demand, Keynes thinks it is mainly related to the interest rate (I) in the money market. The lower the interest rate, the more speculative money is needed. Therefore, speculative money demand is a decreasing function of interest rate, expressed as L2 = L2 (I). However, when the interest rate drops to a certain low point, the demand for money will become infinite, that is, it will enter what Keynes called a "liquidity trap". In this way, the money demand function can be written as:
In other words, the total demand for money is determined by income and interest rate.
In Keynes's analysis of money demand, the so-called "liquidity trap" will appear when the money demand is irregular, which is a state of irregular change of money demand analyzed by Keynes. Keynes believed that, generally speaking, the money demand determined by liquidity preference is mainly influenced by income and interest rate in quantity. Among them, the demand for transactional money is the increasing function of income; Speculative money demand is a decreasing function of interest rate, so money demand is limited. However, when the interest rate drops to a certain low point, because the interest rate is too low, people are no longer willing to hold interest-bearing assets with little income, but are more willing to hold all their wealth in the form of holding money. At this time, the demand for money is no longer limited, but infinite. If the interest rate drops slightly, no matter how much money the central bank increases, it will be absorbed by the money demand. In other words, interest rates below a certain low point have no effect on money demand. It's like there is a big trap in which the central bank's money supply falls. In this case, the central bank's efforts to reduce interest rates by increasing the money supply will fail.
John Maynard Keynes (1June 5, 883-65438+April 2 1 0946), a British economist, is one of the most influential economists in modern economics. Macroeconomics founded by him, psychoanalysis founded by Freud and relativity discovered by Einstein are called the three revolutions of human intellectual circles in the twentieth century. ?
1936, his masterpiece "General Theory of Employment, Interest and Money" was published, and Keynes's other two important economic theory works were "On Monetary Reform" (1923) and "On Money".
References:
Keynes's theory of money demand