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The Case for a Financial Approach to Money Demand

  • Xavier Ragot

    (Banque de France and Paris School of Economics)

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, 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 financial assets can be explained by an incomplete-market model in which frictions are introduced into financial markets. Money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 474.

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Date of creation: 2009
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Handle: RePEc:red:sed009:474
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