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The case for a financial approach to money demand

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Xavier Ragot

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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 PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2008-56.

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Date of creation: 2008
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Handle: RePEc:pse:psecon:2008-56

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