speculative demand for money
Speculative Demand for Money
speculative demand for moneythe demand for MONEY balances that are held in highly liquid form in the hope of taking advantage of bargains in the form of low-priced BONDS or real ASSETS.
Speculative balances are associated with the concept of a ‘normal’ INTEREST RATE. Each holder of speculative balances has his own opinion of what this ‘normal’ rate is. If the current rate of interest is high, this encourages bond holding but discourages money holding because of:
- the high OPPORTUNITY COST of holding cash in terms of interest forgone;
- the negligible risks attached to capital losses because the interest rate is unlikely to rise even further, so reducing the price of bonds (there being an inverse relationship between the price of bonds and the EFFECTIVE INTEREST RATE).
The speculation arises around the future movement of bond prices and when bonds should be bought and sold. When the interest rate is very low and bond prices are high, then:
- people will want to hold speculative balances because the opportunity cost in terms of interest forgone is small; there will be a general expectation of a rise in the interest rate, with a consequent fall in bond prices, and thus the preference is for cash holding. The effect of such forces is to create an inverse relationship between interest rates and the demand for speculative balances.
The speculative demand for money together with the TRANSACTION DEMAND FOR MONEY (money held on a day-to-day basis to finance current expenditures on goods and services) and the PRECAUTIONARY DEMAND FOR MONEY (money held to cover for unforeseen contingencies) constitute the MONEY-DEMAND SCHEDULE. See LIQUIDITY PREFERENCE, L-M SCHEDULE.