speculative demand for money

Speculative Demand for Money

In Keynesian economics, a need for money for investment purposes. That is, speculative demand for money is the desire to have money for transactions other than those necessary for living. Speculative demand includes risk capital for securities. According to John Maynard Keynes, speculative demand is one of the three desires governing demand for money, the others being precautionary demand and transactions demand.

speculative demand for money

the 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:

  1. the high OPPORTUNITY COST of holding cash in terms of interest forgone;
  2. 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:

  3. 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.

References in periodicals archive ?
In such situation, high unemployment will provide high multiplicative public expenditure effect on national income growth and low interest rate will enable high elasticity of speculative demand for money (case of horizontal LM curve).
At the same time, budget deficit increment will have very small influence on interest rate growth because of high elasticity of speculative demand for money (horizontal LM curve).
So, in the situation of full employment, the public expenditure increment will create higher interest rate levels because of low speculative demand for money.
In contrast, in conditions of full employment, when the speculative demand for money is at its minimum level, and the transaction demand for money dominates (that is a prerequisite of monetarists), additional government borrowing for financing public spending would reduce the amount of money available for the private sector (households and firms) and it would lead to increasing of the interest rates.
However, investment in liquid reserves resulting from speculative demand for money may be assessed by usage a call option approach.
The key to his attack on the classical dichotomy was the speculative demand for money, which he presented as an indirect, unstable function of the interest rate.
As such, he included three components in the demand for money: the transactions demand for money (for goods and services)--the only component included in the quantity theory, the precautionary demand for money (for hoards), and the speculative demand for money (money as a financial asset) [De Vecchi, 1995].
It is the speculative demand for money that links the demand for money to the rate of interest and results in the interest rate being determined in the money market instead of the loanable funds market.
From this examination, Keynes concluded that the speculative demand for money is an indirect, yet unstable, function of the rate of interest.
Most of the discussion is devoted to developing a speculative demand for money function.
There is also a speculative demand for money in which |L.
Demand for money is examined here and speculative demand for money is reassessed.