Homogeneity and the Transactions Demand for Money

The paper presents the properties of money demand implied by the Frenkel-Jovanovic (1980) inventory model. Without approximation, the money demand function is implicitly defined by the first-order condition of the model. From the implicit function, we show that the elasticities of money demand satisfy a set of homogeneity conditions. We also show that increasing transactions cost increases the cash flow elasticity, the interest elasticity (in absolute value) and the uncertainty elasticity, but decreases the transactions cost elasticity. If the ratio of cash-flow uncertainty to the transactions variable is small, then the interest elasticity is greater than 1/2. In contrast, it lies between $71 and 1/2 when the approximation method is applied.