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 ?
Thirdly, the speculative demand for money, which is money held as a liquid store of value to be invested in interest bearing bonds at an opportune moment and take advantages of market fluctuations.
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).
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.
The relatively high level of unemployment and speculative demand for money are the characteristics of transition countries which cause that the budget deficit does not necessarily have to increase interest rates, discourage the investors and slow the economic growth.
The rate of inflation is the rate of return on speculative demand for money. Hence we can denote the demand for money as the following:
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.
In addition to using this theory of probability as the basis for his rejection of the loanable funds theory, Keynes also employed his theory of probability to examine the variables that affect the speculative demand for money. From this examination, Keynes concluded that the speculative demand for money is an indirect, yet unstable, function of the rate of interest.
Keynes' examination of the factors that affect the speculative demand for money establishes the existence of an unstable pattern between the speculative demand for money and the rate of interest, due mainly to the existence of uncertainty.
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.sub.s~=f(i) where |L.sub.s~ is the speculative demand for money and i is the interest rate.