The Demand for Money

There are three basic motives for holding money:

transactions-related

precautionary

speculative

Money balances that are held to finance transactions are referred to as transactions money balances.

The size of the transactions balances will tend to increase with the average value of transactions in an economy.

Precautionary money balances are held to provide a buffer against unforeseen events that might require money.

These balances will tend to be larger for individuals or organizations that enter into a high level of transactions over time.

The speculative demand for money (portfolio demand for money) relates to the demand to hold speculative money balances based on the potential opportunities or risks that are inherent in other financial instruments (e.g., bonds).

Speculative money balances consist of monies held in anticipation that other assets will decline in value.

Speculative balances will tend to be inversely related to the expected return on other financial assets and directly related to the perceived risk of other financial assets.