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The case for a financial approach to money demand

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  • Ragot, Xavier

Abstract

The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption expenditures. This is a puzzle for theories which directly link money demand to consumption. This paper shows that the joint distribution of money and financial assets can be explained in a heterogeneous-agent model where both a cash-in-advance constraint and financial adjustment costs, as in the Baumol–Tobin literature, are introduced. Studying each friction in turn, one finds that the financial friction explains more than 78% of total money demand.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 62 (2014)
Issue (Month): C ()
Pages: 94-107

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Handle: RePEc:eee:moneco:v:62:y:2014:i:c:p:94-107

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Money Demand; Money Distribution; Heterogenous Agents;

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  1. Money demand: financial adjustment cost, not cash-in-advance
    by Economic Logician in Economic Logic on 2010-12-02 15:10:00
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Cited by:
  1. Gianluca Violante & Greg Kaplan, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," 2011 Meeting Papers 243, Society for Economic Dynamics.
  2. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.
  3. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, University Library of Munich, Germany.
  4. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.
  5. Yaz Terajima & Jose-Victor Rios-Rull & Césaire Meh & Shutao Cao, 2013. "Demand for Liquidity and Welfare Cost of Inflation by Cohort and Age of Households," 2013 Meeting Papers 569, Society for Economic Dynamics.

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