Abstract

Optimal Type M₁ und M₂

Transaction Cash For a long time now, the quantity concepts M₁ and M₂ have been generally accepted in both the money quantity statistics of central banks and in money supply theory. The theory of the demand for money, however, has hardly been developed at all in this respect. The essay sets out to examine a special area of the theory of demand for money, namely that of transaction cash, and to derive the demand functions for money for transaction purposes for both M₁and M₂. The traditional literature on optimal determination of individual transaction cash (Baumol-Tobin) derives the optimal distribution of M₂between M₁(cash and demand deposits) and M₂- M₁(time deposits) satisfactorily, but starts out from a given stock of M₂. One of the aims of the essay is to determine M₂, which ıs interpreted as an alternative to the holding of goods by both households and firms. One important result arrived at by the study is that the demand for type Ma transaction cash is interest-inelastic and that the income elasticities dıffer for M₁and M₂. A second object of the study is to investigate the relationship between optimal transaction cash of types M₁and M₂and the inflation rate. Whereas in the case of inflation the demand for type M₂is inversely related to the expected inflation rate, the decrease in type M₁transaction cash results from two substitution effects: the rising cost of M₁compared to time deposits on account of the rise in the nominal interest rate and the rising cost of M₁compared to the holding of goods with a value equivalent to the expected inflation rate. This last case explains why “payment practices” (e.g. in inflationary economies) are not an “institutional” datum, but the result of economic choices.