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The Case for a Financial Approach to Money Demand

Listed author(s):
  • Ragot, X.

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. This paper shows that the joint distribution of money and financial assets can be explained in an 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, I find that the financial friction explains 85% of total money demand. Classification-JEL: E40, E50.

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Paper provided by Banque de France in its series Working papers with number 300.

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Length: 44 pages
Date of creation: 2010
Handle: RePEc:bfr:banfra:300
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