Inflation, Money Demand and Portfolio Choice

65 Pages Posted: 22 Feb 2014 Last revised: 21 Aug 2019

See all articles by Kosuke Aoki

Kosuke Aoki

University of Tokyo

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Kalin Nikolov

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: August 21, 2019

Abstract

We estimate a nominal life-cycle portfolio choice model using shopping costs to generate money demand. The model delivers realistic implications for stock market participation and portfolio composition because money crowds out other assets at lower levels of financial wealth. Higher mean inflation leads to a reallocation between money and bonds with a modest impact on stock holdings, while inflation risk can give rise to significant hedging demands. The impact of inflation volatility depends on whether stocks are a hedge against inflation risk. Higher inflation volatility reduces (increases) stock-holdings when inflation has a negative (positive) correlation with real stock returns.

Keywords: Life Cycle Models, Portfolio Choice, Inflation, Money Demand, Stock Market Participation, Uninsurable Labor Income Risk

JEL Classification: E41, G11

Suggested Citation

Aoki, Kosuke and Michaelides, Alexander and Nikolov, Kalin, Inflation, Money Demand and Portfolio Choice (August 21, 2019). Available at SSRN: https://ssrn.com/abstract=2399362 or http://dx.doi.org/10.2139/ssrn.2399362

Kosuke Aoki

University of Tokyo ( email )

Hongo 7-3-1
Bunkyo-ku
Tokyo, Tokyo 113-0033
Japan

Alexander Michaelides (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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