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The Case for a Financial Approach to Money Demand

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  • Ragot, X.

Abstract

The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels. 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 an 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, I find that the financial friction explains 85% of total money demand. Classification-JEL: E40, E50.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 300.

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Length: 44 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bfr:banfra:300

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Keywords: Money Demand; Money Distribution; Heterogeneous Agents.;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  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. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.
  2. Kaplan, Greg & Violante, Giovanni L, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," CEPR Discussion Papers 8562, C.E.P.R. Discussion Papers.
  3. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.
  4. 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.
  5. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, University Library of Munich, Germany.

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