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The Case for a Financial Approach to Money Demand

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  • Xavier Ragot

    (Banque de France and Paris School of Economics)

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, 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 financial assets can be explained by an incomplete-market model in which 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 Society for Economic Dynamics in its series 2009 Meeting Papers with number 474.

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Date of creation: 2009
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Handle: RePEc:red:sed009:474

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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. 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.
  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. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.
  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. Sunel, Enes, 2010. "On inflation, wealth inequality and welfare in emerging economies," MPRA Paper 25943, University Library of Munich, Germany.

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