The Case for a Financial Approach to Money Demand
44 Pages Posted: 27 Oct 2010
Date Written: October 2010
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.
Keywords: Money Demand, Money Distribution, Heterogeneous Agents
JEL Classification: E40, E50.
Suggested Citation: Suggested Citation