■ What Tobin stated ?
Tobin's main concept laid down to the Portfolio Optimization approach. He focused to design a portfolio on money speculations and bond adding them together. Money has no risk so there's no return but bond has risk and there's return as well.
People choose less risk and more return.
The expression for the optimization of the Tobin's portfolio is:
R = (r/j) × J
where, r = rate of return
j = rate of risk
J = Total risk
Now the portfolio is optimized at the two conditions:
a) At given rate of interest
b) At varying rates of interest
Tobin plotted the individual IC's into the rate and return and stated possible combination of money and bond with the associated risks.
Now the analogy comes over here.
♢ Keynes tells
Msp (Money speculated) is inversely related to rate of interest and its graph also slopes (negatively relation) when we plot the interest rate with Money speculated. We know that the curve eventually rests to the liquidity trap position at the lower ate of interest.
♢ Tobin tells
The money speculated (Msp) is indirectly rekated to the rate of risk (j). It is the downward sloping curve having a negative slope when we plot i and Msp.
Here, Msp is also the line of the possible combination of money and bond with the associated risks.
In this, if Msp and i are assumed to be constantly related, it may take the shape of downward sloping straight line.
Thus, now it's completely evident that the Keyenes only focuses on the interest and demand concept of money but Tobin focuses on the risk and return and the Speculative demand.
For this Tobin here stands ahead of Keynes.
Thank you
Aditya Pokhrel
MBA, MA Economics, MPA
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