SPECULATIVE DEMAND FOR MONEY | MARTINS LIBRARY

The statement that money is held by people for the transaction and precautionary purposes is in conformity with the classical approach to the demand for money because transactions demand for money is dependent on money’s function as the medium of exchange in the economy while the precautionary demand for money can be added to the classical approach without materially altering its conclusions. The speculative demand for money, however, marks a

complete break with the classical theory of the demand for money. The speculative demand for money recognizes money’s role as the permanent store of value or as Milton Friedman has termed it the permanent abode of purchase power.

According to the classicists, people would not hold assets in the unproductive or barren form of money because by doing so they would have t forgo interest income which could be earned by purchased interest-bearing riskless government securities instead of holding money which was barren. Even if the rate of interest was low, it was better to earn some income than none at all.

REFERENCE

John N.O. Ibe (2000) Fundamentals of Monetary Theory,  Policy 

Glahoh and Company

M.C Vaish (2005) Monetary Theory Sixteenth Edition,

 Vikas Publishing House PVT Ltd

Melzer, Allan H. “The Demand for Money: The Evidence from the

Time Series,” Journal of Political Economy (June 1963), PP. 219-46.