The Case for a Financial Approach to Money Demand

44 Pages Posted: 27 Oct 2010

See all articles by Xavier Ragot

Xavier Ragot

National Center for Scientific Research (CNRS)

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

Ragot, Xavier, The Case for a Financial Approach to Money Demand (October 2010). Banque de France Working Paper No. 300, Available at SSRN: or

Xavier Ragot (Contact Author)

National Center for Scientific Research (CNRS)

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