While there are a number of issues in economics which are
frequently scrutinized, the most important of them probably is the
determination of a stable money demand function. Other issues in this
regard relate to the choice between (i) broad vs. narrow definition of
money; (ii) measured vs. permanent income; (iii) short-term vs.
long-term interest rate; and (iv) inclusion of a variable for inflation
or expected inflation. Quite recently, a new dimension has been added to
the demand for money function. It is now argued that unanticipatory
changes in the nominal money supply also affect the real demand for
money. Darby (1972) has proposed that unanticipatory nominal money
supply behaves as a shock-absorber in the money demand function.
Initially, Laidler (1980) and then Carr and Darby (1981) formulated a
shock-absorber model in which they have shown empirically that
unanticipatory shocks in money supply positively affect the demand for
money. Inclusion of this shock variable was justified by Darby (1972) on
the ground that money balances serve as a buffer stock or shock-absorber
which temporarily absorbs unexpected variations in income, especially
the transitory income, until an adjustment is reached in adjusting the
portfolio of securities and in consumer durable goods. The shock
absorber model of Carr and Darby is based on the following two
hypotheses:
Monetary Anticipations and the Demand for Money: An Application
for the South Asian Region