Speculative Demand for Money

Speculative Demand for Money

The most important contribution of Keynes is that
he added the idea that since money is a store of value it is therefore
an asset that people can hold as wealth. He therefore viewed money
as one asset in an individual’s portfolio and considered how an
individual divides his wealth between money and alternative interest
earning assets.

The important variable according to Keynes that determine the split
of an individual’s portfolio between money and bonds was the
interest rate on bonds. At high interest rate, the opportunity cost of
holding money is high (the forgone interest payments). Added
to this according to Keynes is the fact that when interest rate is
high relative to some fixed view of the normal level, the public
would expect interest rate to fall. A decline in interest rate will
mean a capital gain on bonds.