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On the Welfare Cost of Inflation and the Recent Behavior of Money Demand

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  • Peter N. Ireland

Abstract

Post-1980 US data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semielasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule. (JEL E31, E41, E52)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.3.1040
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 3 (June)
Pages: 1040-52

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:3:p:1040-52

Note: DOI: 10.1257/aer.99.3.1040
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Citations

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Cited by:
  1. Guerron-Quintana, Pablo A., 2011. "The implications of inflation in an estimated new Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 947-962, June.
  2. Alessandro Calza & Andrea Zaghini, 2011. "Welfare costs of inflation and the circulation of U. S. currency abroad," Globalization and Monetary Policy Institute Working Paper 78, Federal Reserve Bank of Dallas.
  3. Cysne, Rubens Penha & Turchick, David, 2010. "Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1015-1030, June.
  4. Jan Babecky & Oxana Babetskaia-Kukharchuk & Kamil Galuscak & Dana Hajkova & Jaroslav Hermanek & Tomas Holub & Roman Horvath & Petr Jakubik & Lubos Komarek & Zlatuse Komarkova & Petr Kral & Filip Novot, 2008. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2008," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, number as08 edited by Dana Hajkova, May.
  5. Matthias Paustian & Christian Stoltenberg, 2006. "Optimal Interest Rate Stabilization in a Basic Sticky-Price Model," SFB 649 Discussion Papers SFB649DP2006-072, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. repec:pra:mprapa:23056 is not listed on IDEAS
  7. Dutkowsky, Donald H. & VanHoose, David D., 2011. "Interest on bank reserves and optimal sweeping," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2491-2497, September.
  8. Guillaume Rocheteau, 2011. "The cost of inflation: a mechanism design approach," Working Paper 1103, Federal Reserve Bank of Cleveland.
  9. Alessandro Calza & Andrea Zaghini, 2010. "Sectoral money demand and the great disinflation in the US," Working Paper Series 1218, European Central Bank.
  10. Cysne, Rubens Penha, 2008. "A note on "Inflation and Welfare"," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1984-1987, September.
  11. Steven F. Koch & Adel Bosch, 2009. "Inflation and the Household: Towards a Measurement of the Welfare Costs of Inflation," Working Papers 200917, University of Pretoria, Department of Economics.

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