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On Cash-in-Advance Models of Money Demand and Asset Pricing

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  • Bohn, Henning

Abstract

This paper shows how a cash-in-advance model of money can be written in a way that combines a simple, yet empirically defensible, money demand function with an asset pricing equation that is similar to the standard barter-economy Euler equations. Return premia are determined as in the barter exchange model, except that a short-term, risk-free, nominal interest rate enters into the first-order conditions. In special cases, asset prices satisfy the barter-economy Euler equations exactly. In the empirical analysis, the interest rate factor adds some explanatory power, but both the barter and the monetary asset pricing model perform rather poorly. Copyright 1991 by Ohio State University Press.

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  • Bohn, Henning, 1991. "On Cash-in-Advance Models of Money Demand and Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 224-242, May.
    • Handle: RePEc:mcb:jmoncb:v:23:y:1991:i:2:p:224-42
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    Cited by:

    1. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
    2. Thomas Chiang & Jose Trinidad, 1997. "Risk and International Parity Conditions: A Synthesis from Consumption Based Models," International Economic Journal, Taylor & Francis Journals, vol. 11(2), pages 73-101.
    3. Norrbin, Stefan C. & Reffett, Kevin L., 1996. "A substitution test of long-run money demand," Journal of Macroeconomics, Elsevier, vol. 18(2), pages 253-270.
    4. Ricardo Lagos, 2011. "Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 521-552, October.
    5. Travis D. Nesmith, 2005. "Solving stochastic money-in-the-utility-function models," Finance and Economics Discussion Series 2005-52, Board of Governors of the Federal Reserve System (U.S.).
    6. Scheffel, Eric, 2008. "A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Cardiff Economics Working Papers E2008/30, Cardiff University, Cardiff Business School, Economics Section.
    7. Maio, Paulo & Silva, André C., 2020. "Asset pricing implications of money: New evidence," Journal of Banking & Finance, Elsevier, vol. 120(C).
    8. Travis D. Nesmith, 2024. "Revisiting Risky Money," Finance and Economics Discussion Series 2024-090, Board of Governors of the Federal Reserve System (U.S.).
    9. Singh, Sunny Kumar, 2016. "Currency demand stability in the presence of seasonality and endogenous financial innovation: Evidence from India," MPRA Paper 71552, University Library of Munich, Germany.
    10. Caballe, Jordi & Panades, Judith, 2004. "Inflation, tax evasion, and the distribution of consumption," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 567-595, December.

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