Speculative motive

Indian Economy glossary

Also called: Speculative demand for money · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

The speculative motive is the reason people hold money instead of bonds: they want to avoid a capital loss (a fall in the value of what they own) if interest rates rise. Bond prices move opposite to interest rates. When the rate is high, people expect it to fall, so they buy bonds and hold little money. When the rate is low, people expect it to rise, so they sell bonds and hold money. So speculative demand falls as the interest rate rises: Msd = (rₘₐₓ − r)/(r − rₘᵢₙ)

Example

Take a 2-year bond with a face value of ₹100 and a 10% coupon (the fixed yearly interest it pays). At a market interest rate of 5%, it is worth about ₹109.29. At 6%, it is worth only about ₹107.33. Someone who expects rates to rise will hold cash to avoid this loss.

Don't confuse with

  • Transaction motive: here money is held to pay for everyday purchases. This demand depends on income and the price level, not on what people expect interest rates to do.

Related concepts

Read more