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The case for a financial approach to money demand

  • Ragot, Xavier

The distribution of money across households is much more similar to the distribution of financial assets than to that of consumption expenditures. 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 a 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, one finds that the financial friction explains more than 78% of total money demand.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 62 (2014)
Issue (Month): C ()
Pages: 94-107

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Handle: RePEc:eee:moneco:v:62:y:2014:i:c:p:94-107
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