The case for a financial approach to money demand

Pre-print, Working paper: The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels, even controlling for life-cycle effects. This is a puzzle for theories which directly link money demand to consumption, such as cash-in-advance (CIA), money-in-the-utility function (MIUF) or shopping-time models. This paper shows that the joint distribution of money and nancial assets can be explained by an incomplete-market model when frictions are introduced into financial markets. Money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets.

Author(s)

Xavier Ragot

Date of publication
  • 2008
Keywords JEL
E40 E50
Keywords
  • Money demand
  • Money distribution
  • Heterogenous agents
Internal reference
  • PSE Working Papers n°2008-56
Version
  • 1