Inflation, Money Demand and Portfolio Choice

61 Pages Posted: 22 Dec 2015

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: February 28, 2014

Abstract

We introduce a money demand motive in a life-cycle portfolio choice model and estimate the structural parameters that can generate limited stock market participation and plausible holdings of money, bonds and stocks. The model predicts an increase in bond holdings over the life cycle, and a declining share of money in portfolios as wealth increases. Both predictions are consistent with the data, even though the model overpredicts (underpredicts) stock (bond) holdings in early life. When mean inflation approaches zero, the share of money in the financial portfolio rises at the expense of both bond and stockholdings, generating simultaneously a lower stock market participation rate.

Keywords: Life cycle models, portfolio choice, Infl‡ation, 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 (February 28, 2014). Netspar Discussion Paper No. 02/2014-101. Available at SSRN: https://ssrn.com/abstract=2706512 or http://dx.doi.org/10.2139/ssrn.2706512

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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