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Inflation, Money Demand, and Portfolio Choice

Author

Listed:
  • Kosuke Aoki

    (Faculty of Economics, University of Tokyo, Tokyo 113-0033, Japan)

  • Alexander Michaelides

    (Department of Finance, Imperial College Business School, London SW7 2AZ, United Kingdom)

  • Kalin Nikolov

    (Research Department, European Central Bank, 60313 Frankfurt, Germany)

  • Yuxin Zhang

    (Department of Finance, Accounting and Economics, Nottingham University Business School, University of Nottingham, Ningbo 315100, China)

Abstract

We estimate a structural, nominal, life-cycle portfolio choice model with exogenous housing tenure and use shopping costs to generate money demand. Homeowners (renters) with negative (positive) net bond positions react differently to changing inflation risks. The correlation between real bond and real stock returns emerges as the strongest inflation risk quantitatively and generates large increases in stock market demand for homeowners in a 1970s counterfactual. Higher expected inflation encourages stock market participation but affects negatively poorer households without access to that adjustment. A more negative inflation-bond return correlation pushes homeowners more into the stock market, whereas poorer renters move into money.

Suggested Citation

  • Kosuke Aoki & Alexander Michaelides & Kalin Nikolov & Yuxin Zhang, 2026. "Inflation, Money Demand, and Portfolio Choice," Management Science, INFORMS, vol. 72(2), pages 853-873, February.
    • Handle: RePEc:inm:ormnsc:v:72:y:2026:i:2:p:853-873
    DOI: 10.1287/mnsc.2022.02007
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    References listed on IDEAS

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