The concept of the Speculative, or Asset, demand for money owes its origins prim

Question

The concept of the Speculative, or Asset, demand for money owes its origins primarily to John Maynard Keynes.  The Keynesian theory of the Speculative/Asset demand for money has certain weaknesses, which led to James Tobin reformulating this component of the demand for money, in terms of what is now called portfolio balance theory.  Discuss, in detail, how Tobin went about reformulating the Speculative/Asset demand for money.   In what way did Tobin overcome the weaknesses in the Keynesian version of the theory of this component of the demand for money?  Explain.

Explanation / Answer

Keynesian view of demand for money suffers from a major drawback. It suggest that people Hold money either for holding it as an asset or speculative purposes and nothing in between, which implies that either they Hold money entirely or they invested in bonds entirely. In reality however people use their money in different types of bonds stocks equities. Using a Portfolio of different type of financial instruments mitigates the risk of losing wealth dramatically. This is the basic view of portfolio balance theory which suggest that people do not hold their money entirely in bonds but they used a Portfolio.

People are both money holder and bondholder and this diversify the risk. Most of the investors are these covers and they do not invest in risky assets entirely in this sense they hold a Portfolio which is balance between risky Assets and safe assets. In this way Tobin was able to overcome the weakness of demand for money presented by Keynesians.

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