An Experimental Test of the Baumol-Tobin Transactions Demand for Money

Steven Beckman and Joshua N Foreman

Journal of Money, Credit and Banking, 1988, vol. 20, issue 3, 291-305

Abstract: Historically generated data do not allow a clean test of any particular money dema nd theory. By creating the artificial environment analyzed by William Baumol and James Tobin's work on the transactions demand for money, one can observe how real people pursuing real rewards behave in that environment. Baumol and Tobin assumed people were sufficiently rational to learn four axioms of rational behavior. The authors' subjects learned only three. However, trial and error methods, plus subjects' limited rationality, did produce results similar to the Baumol-Tobin predictions. This supports the need to weaken the definition of rationality in the manner suggested by Herbert Simon. Copyright 1988 by Ohio State University Press.

Date: 1988
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