Inflation, Money Demand and Portfolio Choice

66 Pages Posted: 22 Dec 2015 Last revised: 11 May 2020

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: May 10, 2020


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 wealth. We quantify how changing
correlations between inflation, real bond and stock returns, and changes in
the inflation process affect household portfolios. Higher mean inflation
increases stock market participation, while portfolios shift to bonds and
stocks, and away from money. A negative inflation-bond return correlation,
or a positive stock-bond return correlation, reduces the diversification
benefit from holding bonds, encouraging a higher stock exposure.

Keywords: Life cycle models, portfolio choice, Infl‡ation, money demand, stock market participation, uninsurable labor income risk

JEL Classification: E41, G11, G50

Suggested Citation

Aoki, Kosuke and Michaelides, Alexander and Nikolov, Kalin, Inflation, Money Demand and Portfolio Choice (May 10, 2020). Netspar Discussion Paper No. 02/2014-101, Available at SSRN: or

Kosuke Aoki

University of Tokyo ( email )

Hongo 7-3-1
Tokyo, Tokyo 113-0033

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)

United Kingdom

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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