THE EXPECTED LEVEL OF THE INTEREST RATE AND THE DEMAND FOR MONEY

The paper contains a theoretical analysis of the demand for money. The author defines the individual demand function and the aggregate demand function based on it, depending on the market interest rate, and he discusses the ability of the central bank to influence its level. The analysis is based on the concept of portfolio choice developed by Tobin, supplemented by the modified Keynesian concept of the normal interest rate where the latter is defined as an interval rather than an exact level considered to be normal. The dependence between the interest rate and the individual demand for money is established using a microeconomic analysis of the income and substitution effect of the interest rate. The analysis shows that the aggregate functional dependence between the interest rate and the demand for money can only exist within the normal interval of the interest rate provided that expectations of economic agents as to the normal range of the interest rate are not highly differentiated. It also shows that the market interest rate tends towards its normal interval, which means that an effective control over its level must include an influence on the expectations of economic agents.