Inflation, Money Demand and Portfolio Choice
61 Pages Posted: 22 Dec 2015
Date Written: February 28, 2014
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, Inflation, money demand, stock market participation, uninsurable labor income risk
JEL Classification: E41, G11
Suggested Citation: Suggested Citation