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The case for a financial approach to money demand

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  • Xavier Ragot

    () (PJSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris, PSE - 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, even controlling for life-cycle effects. 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 nancial assets can be explained by an incomplete-market model when frictions are introduced into financial markets. Money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets.

Suggested Citation

  • Xavier Ragot, 2008. "The case for a financial approach to money demand," Working Papers halshs-00586066, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00586066
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00586066
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