4. Some economists are very much impressed by his vigorous presentation of the theory, while many do not concur with the Chicago version. Elsevier. The main criticisms levelled against Friedman’s analysis are: 1. We also provide new evidence on the stability of euro area money demand based on a framework that captures the effect of uncertainty on the demand for money, an idea first proposed by Friedman (1956). As Wrightsman observes, Friedman’s definition of money is broad which includes time deposits along with the demand deposits and currency. Friedman’s theory of demand for money can be used to restate the Cambridge money demand equation so as to bring out the important role of money demand function in the determination of the level of economic activity. Friedman thought that the liquidity premium on money was unlikely to keep interest "too high"; for Friedman the interest rate is determined solely in the loanable funds market by time preference and productivity, a’la Irving Fisher. 2. Goldfeld, Stephen M., and Daniel E. Sichel (1990). Thus Friedman money demand function can be restated as follows: M d = K(P, Y, r … Milton Friedman asserted that "the quantity theory is in the first instance a theory of the demand for money. "The Quantity Theory of Money: A Restatement," in Studies in the Quantity Theory of Money, Chicago. Reprinted in The Optimum Quantity of Money (2005), pp. The remainder of this paper is structured as follows. New York: Stockton Press; and London: Macmillan, 1987. "The Demand for Money," in Handbook of Monetary Economics, v. 1, pp. 299–356. 4, pp. 1 “Quantity Theory of Money” by Milton Friedman In The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate, and Peter Newman, vol. interest rates and money demand is weak, since relativeincentive to hold money does not change very much. Friedman, Milton (1956). Friedman’s analysis treats the demand for money in the same way as the demand for an ordinary commodity. Milton Friedman propounded the wealth theory of demand for money. In his view, money is “a durable consumer good held for the services it renders, and yielding a flow of services proportional to the stock.” Money is demanded as an asset or capital; as such the theory of demand for money is a part of the theory of capital. Finally, unlike the liquidity preference theory, Friedman’s modern quantity theory predicts that interest rate changes should have little effect on money demand. 3-20. Introduction. of a stable money demand function, and the strategy adopted by the ECB. It can be viewed as a producer’s good; businesses hold cash balances to improve efficiency in their financial transactions and are willing to pay, in terms of … 51-67. For Keynes the demand for investment was inherently unstable, for "beauty contest" reasons. Friedman also believed that random fluctuations in the demand for money should be small, and thus that his money demand equation predicts well money demand… It is not a theory of output, or of money income, or of the price level.” The demand of money from those who hold great wealth has a direct relationship with that of the demand for a consumption service. This is in stark contrast to Keynes. 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