We introduce a money demand motive in a life-cycle portfolio choice model and estimate the structural parameters that can generate limited stock market participation and plausible holdings of money, bonds and stocks. The model predicts an increase in bond holdings over the life cycle, and a declining share of money in portfolios as wealth increases. Both predictions are consistent with the data, even though the model overpredicts (underpredicts) stock (bond)
holdings in early life. When mean in?flation approaches zero, the share of money in the ?financial portfolio rises at the expense of both bond and stockholdings, generating simultaneously a lower stock market participation rate.