The case for a financial approach to money demand

Xavier Ragot (1, 2)

1 PSE - Paris School of Economics
2 PSE - Paris-Jourdan Sciences Economiques

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.

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.

Mots clés: Money Demand; Money Distribution; Heterogenous Agents

Domaines: Economies et finances

Xavier Ragot. The case for a financial approach to money demand. Journal of Monetary Economics, 2014, 62 (1), pp.94 - 107. ⟨10.1016/j.jmoneco.2013.09.005⟩. ⟨halshs-00978785⟩