Demand for money as financial asset

Abstract

Tobin's seminal article (1958) derived the behaviour of money demand due to the speculative motive for liquidity preference, pioneering the idea of an existing financial investment motive behind holding money, which is supposed to be included in the investors' portfolios as a riskless financial asset. His objective was to find a consistent explanation for the liquidity preference function of Keynes (L2). Tobin moved to conclude that every risk-averse rational individual optimising his expected utility always invests a part of his wealth in money and concluded that the keynesian L2 was consistent. Howevwe, he did not derive a formula for money demand and did not find its elasticity. Moreover, he did not take into account that money is an asset yielding some income, since it includes time deposits earning interests. This paper generalises money demand on the basis of the theory of financial investments, derives overall money demand, and examines the problem of its elasticity, so as to recover the issue of liquidity trap existence. We discuss the similarity of this demand function with Keyne's, as well as its robusteness ( and that of the underlying microeconomic model) to alternative scale factors, to the consideration that money yields a certain return, and to alternative concepts of uncertainty/risk, sheding some light on the Post Keynesian discussion on this matter.