On Cash-In-Advance Models of Money Demand and Asset Pricing (Reprint 007)

Henning Bohn ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: The paper shows how a cash-in-advance model of money demand can be written in a way that combines a simple, yet empirically defensible, money demand equation with tractability in asset pricing. Return premia are determined as in the standard barter exchange model, except that a short-term risk-free nominal interest rate enters into the first order condition. In special cases, asset prices satisfy the familiar barter-economy Euler equations exactly. Thus, contrary to much of the literature, money may not significantly affect asset pricing. Simple barter-economy Euler equations are approximately valid even in the presence of money.

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Persistent link: http://EconPapers.repec.org/RePEc:fth:pennfi:16-89

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