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On Cash-In-Advance Models of Money Demand and Asset Pricing (Reprint 007)

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  • Henning Bohn

Abstract

The paper shows how a cash-in-advance model of money demand can be written in a way that combines a simple, yet empirically defensible, money demand equation with tractability in asset pricing. Return premia are determined as in the standard barter exchange model, except that a short-term risk-free nominal interest rate enters into the first order condition. In special cases, asset prices satisfy the familiar barter-economy Euler equations exactly. Thus, contrary to much of the literature, money may not significantly affect asset pricing. Simple barter-economy Euler equations are approximately valid even in the presence of money.

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Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 16-89.

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Handle: RePEc:fth:pennfi:16-89

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