Production, Financial Sophistication, and the Demand for Money by Households and Firms

Abstract

A framework for modeling the demand for money by households and firms is proposed. It allows for both endogenous and exogenous changes in the degree of financial sophistication as well as for multiple monetary assets.The framework is especially useful for interpreting and comparing the many empirical estimates of money demand, as it lists relationships among a variety of empirical and theoretical specifications.We consider a parametric version of the model, and show how the parameters are related to the behavior of various aggregate variables including the aggregate demand for money by firms, the aggregate demand by households, and the aggregate national demand.

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