Are Money Balances An Inferior Asset?: Rational Expectations and the Household Demand for Money

The rational expectations hypothesis presents the challenge that estimates of permanent income should be calculated from the statistical expectation of such income. This study reports on basic research undertaken on this proposition as it applies to the demand for money, a relation generally considered to be a function of permanent income. Data on 735 households from a national sample of the U.S reveals that consumers reduce their demand deposits in response to an increase in lifetime wealth. The data also reveals that households do not exhibit money management behavior consistent with full information.