Speculative demand for money refers to the demand for highly liquid financial assets, such as domestic money or foreign currency, that is not dictated by real transactions such as trade or consumption expenditure. It arises from the perception that money is optimally part of a portfolio of assets being held as investments. Speculative demand is one of the determinants of demand for money, along with transactions demand and precautionary demand. The key features of speculative demand for money are:
- Purpose: The holding of real balances for the purpose of avoiding capital loss from holding bonds or stocks.
- Return: The net return on bonds is the sum of the interest payments and the capital gains (or losses) from their varying market value. A rise in interest rates causes aftermarket bond prices to fall, and that implies a capital loss from holding bonds. Accordingly, the return on bonds can be negative. Thus, people may hold money instead of bonds to avoid capital loss.
- Investment opportunities: Speculative demand arises from the need for cash to take advantage of investment opportunities that may arise.
Overall, speculative demand for money is one of the reasons why people hold money instead of other financial assets such as bonds or stocks.
