This paper studies households' demand for different assets by allowing certain assets to contribute directly to household utility. We permit the utility function to capture the “liquidity” services of money, certain time deposits, and even some government securities. Our approach yields estimates of the utility function parameters which can be used to study the effects of a variety of changes in asset returns. We investigate how asset holdings and consumption react to both temporary and permanent changes in returns, and study the effects of government financial policy.

Our approach provides an integrated system of asset demands of the form that Tobin and Brainard (1968) advocate for studying the effects of government interventions in financial markets. It provides a tractable alternative to the atheoretical equations that are commonly used to study the demand for money and other assets. Those equations, which cannot be interpreted as the rational response of any economic agent to changes in the economic environment, are unlikely to remain stable when the supply of various nonmonetary assets changes.