Contemplations on the demand for money...

Last week I was teaching classes about the quantity theory of money. We’d started with the crude quantity theory (price level is proportional to the money supply) and discussion shifted to a discussion of the concept of the market for money, and specifically the demand for money. Analysis of the money markets doesn’t feature in Level 2 Economics, but our discussion came in response to a really interesting and perceptive student question about interest rates.

I described the three determinants of the demand for money as theorised by J M Keynes: transactions demand, precautionary demand, and speculative demand, and we pondered possible changes to the transactions demand amongst Christchurch residents.

I related my own experience post 22 February 2011. At that time we were in the habit of carrying very little cash in our wallets, being more used to using cards to either purchase on credit or draw down on demand deposits using those same cards. In those dreadful days immediately following 22 February power outages meant that access to demand deposits was effectively cut off as ATMs and credit card terminals were not operational, and so we found it difficult to make purchases because we had little cash.

We would expect the transactions demand for money to increase in the weeks and months immediately after 22 February, and we speculated on whether t there was at ‘legacy behaviour’ amongst Christchurch residents. We wondered whether Christchurch residents still maintained larger cash balances in their wallets now than they might have done prior to 22 February. I suspect that many Christchurch residents are experiencing relatively unusual post earthquake behaviours/habits. For example I feel anxiety when separated from my cellphone, and hate to see my car fuel tank drop below half full. It is always filled when I go to the service station.

On the subject of the transactions demand for money, I tend to carry a little more cash on me than I would have done prior to 22 February 2011. Were we able to measure changes in the transactions demand, would we find a regional variation in Christchurch? Worth pondering!!!