Inflation, Money Demand and Portfolio Choice

75 Pages Posted: 22 Dec 2015 Last revised: 25 Apr 2022

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)

Yuxin Zhang

Renmin University of China; Renmin University of China

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2022

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 wealth levels. We quantify how changing
correlations between inflation, real bond and stock returns, and changes in
the inflation process, affect household portfolios. 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. A 1970s inflation regime can increase stock allocations but effects depend on inflation pass through to nominal interest rates.

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 and Zhang, Yuxin and Zhang, Yuxin, Inflation, Money Demand and Portfolio Choice (April 25, 2022). 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

Yuxin Zhang

Renmin University of China ( email )

57 Zhong Guanchun Road
Haidian District
Beijing, Beijing 100872
China

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

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