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The case for a financial approach to money demand

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  • Xavier Ragot

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

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.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00586066.

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Date of creation: Oct 2008
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Handle: RePEc:hal:psewpa:halshs-00586066

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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, 2013. "Liquidity and Welfare," 2013 Meeting Papers, Society for Economic Dynamics 204, Society for Economic Dynamics.
  3. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.
  4. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, 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, Society for Economic Dynamics 569, Society for Economic Dynamics.

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