# Microfoundations of Monetary Dynamics

# Microfoundations of Monetary Dynamics

The HRL Formulation of the Demand for Money

This chapter examines the microfoundations of Maurice Allais's theory of monetary dynamics, with particular emphasis on his hereditary, relativist, and logistic (HRL) formulation of the demand for money. According to the HRL formulation, the ratio of desired money-to-aggregate nominal spending is a logistic decreasing function of the present value of past growth rates in nominal spending. Allais assumed that the demand for money was a function of nominal growth “expectations” and that “expectations” were formed adaptively and could be represented by an exponential average of the sequence of historic rates of nominal growth. He observed that exponential averages were good at fitting empirical data on average over whole samples, but were struggling with the different phases of inflationary processes. Allais modeled this observed variability of the elasticity of “expectations” by formulating three psychological assumptions: the hereditary assumption, the relativist assumption, and the logistic assumption. The chapter discusses these three assumptions and the elasticities in the HRL formulation before concluding with an analysis of how the HRL formulation quantifies the perceived flow of calendar time.

*Keywords:*
monetary dynamics, Maurice Allais, demand for money, HRL formulation, nominal spending, expectations, exponential averages, inflation, elasticity, calendar time

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