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The case for a financial approach to money demand

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  • Ragot, Xavier

Abstract

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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  • Ragot, Xavier, 2014. "The case for a financial approach to money demand," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 94-107.
    • Handle: RePEc:eee:moneco:v:62:y:2014:i:c:p:94-107
    DOI: 10.1016/j.jmoneco.2013.09.005
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    More about this item

    Keywords

    Money Demand; Money Distribution; Heterogenous Agents;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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