ABSTRACT
One major strand of Keynesian analysis traces the implications of a particular empirical assumption about the demand for money — that its elasticity with respect to interest rates is very high, approaching infinity. A number of economists have attributed major theoretical importance to the opposite empirical assumption about the demand for money— that its elasticity with respect to interest rates is negligible. Such a situation, they assert, would have far-reaching implications for the theoretical possibility of separating monetary and real forces and for monetary policy. Keynes' analysis of liquidity preference and of how interest rates affect the quantity of money demanded is certainly a basic contribution to monetary theory and it has stimulated important and valuable research. The important consideration for monetary theory and policy is whether the demand for money can be treated as a reasonably stable function of a fairly small number of variables and whether this function can be empirically specified with reasonable accuracy.
