Friedman’s Theory of Demand for Money

Friedman, a noted monetarist economist, put forward demand for money function that plays an important role in his restatement of the quantity theory of money and prices. Friedman believed that money demand function is most important stable function of macroeconomics.
  Money is considered as one type of asset in which wealth holders can keep a part of their wealth. Business firms take money as a factor of production capital good or a capital good that they combine with the services of other factors of production to produce and services.

Individuals hold money for the services it provides to them such as general purchasing power so that it can be conveniently used for procuring goods and services. 

Friedman’s approach to demand for money neither consider any motives for holding money nor does it distinguish between speculative and transactions demand for money. He considers the demand for money merely as an application of a general theory of demand for capital assets. 
 

To Friedman money also yields return and provides services like other capital assets. He identified various factors that determine the demand for money and derived demand for money function. The value of goods and services that money can buy represents the real yield on money. The real yield of money in terms of goods and services it can buy will depend on the price level of goods and services. Besides money, bonds are another type of asset in which people can hold their wealth. Bonds are a type of securities, which yield interest income, stable in nominal terms. Yield on bond is the coupon rate of interest and also can anticipate gain or loss due to expected changes in the market rate of interest.

Shares or Equities are another form of asset in which wealth can be maintained. The dividend rate determines the yield from equity, capital gain or loss the investors expect and expected changes in the price level. The stock of producer and durable consumer commodities are another form of asset in which people can hold their wealth. These also yield a stream of income but in kind rather than money. 

Thus, the basic yield from commodities is implicit one. Friedman also views an explicit yield from commodities in the form of expected rate of change in their price per unit of time. Friedman’s nominal demand function (Md) for money can be expressed as : 
M^d = f( W,h,r_m,r_b,r_e,P DP,  U ) . 
As the demand for real money balance is nominal demand for money divided by the price level, we can write the demand for real money balances as: M^d / P = f( W,h,r_m,r_b,r_e,P DP /P,  U).

Where : M^d stands for nominal demand for money, M^d /P  represents demand for real money balances, W denotes for wealth of the individuals, H for the ratio of human wealth to the total wealth individuals hold