On the Microtheoretic Foundations of Cagan’s Demand for Money Function

Rajat Deb (), Kaushal Kishore and Tae Kun Seo
Additional contact information
Rajat Deb: Southern Methodist University
Kaushal Kishore: Southern Methodist University
Tae Kun Seo: Southern Methodist University

A chapter in Rational Choice and Social Welfare, 2008, pp 181-193 from Springer

Abstract: An extensive literature, both theoretical (see for instance, Bruno and Fischer (1990), Calvo and Leiderman (1992), Friedman (1971), Goldman (1974), Sargent and Wallace (1973)) and empirical, (see for instance, Aghevli and Khan (1977), Anderson, Bomberger, and Makinen (1988), Babcock and Makinen (1975), Cagan (1956), Christiano (1987), Easterly, Mauro, and Schmidt-Hebbel (1995), Engsted (1993), Metin and Maslu (1999), Michael, Nobay, and Peel (1994), Pickersgill (1968), Salemi and Sargent (1979), Taylor (1991)) has arisen around the special semi-logarithmic demand for money function introduced by Cagan (1956). Cagan’s motivation behind the demand for money function was mainly in terms of transactions costs and its relationship to the consumer’s ability to affect the real value of cash balances. Cagan argued that the real cost of holding cash balances fluctuates widely enough to account for the dramatic changes in the holding of cash balances observed during hyperinflation. He hypothesized that during periods of hyperinflation the demand for money is almost entirely explained by the variation in the expected rate of change in prices and that changes in expected inflation have the same effect on real balances in percentage terms regardless of the absolute amount of initial cash balances. In other words, during hyperinflations, the demand for money takes the special form: m = ke−λπ e, where m is the real demand for money, π (e) is the expected rate of inflation and k, λ are positive constants.

Keywords: Utility Function; Transaction Cost; Real Interest Rate; Money Demand; Interior Solution (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:stcchp:978-3-540-79832-3_10

Ordering information: This item can be ordered from
http://www.springer.com/9783540798323

DOI: 10.1007/978-3-540-79832-3_10

Access Statistics for this chapter

More chapters in Studies in Choice and Welfare from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().