Individual and Aggregate Money Demands
26 Pages Posted: 29 Jun 2007 Last revised: 4 Aug 2011
Date Written: July 1, 2011
I construct a model in which money and bond holdings are consistent with individual decisions and aggregate variables such as production and interest rates. The agents are infinitely-lived, have constant-elasticity preferences, and receive a fraction of their income in money. Each agent solves a Baumol-Tobin money management problem. Markets are segmented because financial frictions make agents trade bonds for money at different times. Trading frequency, consumption, government decisions and prices are mutually consistent. An increase in inflation, for example, implies higher trading frequency, more bonds sold to account for seigniorage, and lower real balances.
Keywords: money demand, cash management, inventory problem, market segmentation
JEL Classification: E3, E4, E5
Suggested Citation: Suggested Citation