Advanced Search
MyIDEAS: Login to save this article or follow this journal

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

Contents:

Author Info

  • 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)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.3.1040
Download Restriction: no

File URL: http://www.aeaweb.org/aer/data/june09/20071203_data.zip
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

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

as in new window
Handle: RePEc:aea:aecrev:v:99:y:2009:i:3:p:1040-52

Note: DOI: 10.1257/aer.99.3.1040
Contact details of provider:
Email:
Web page: https://www.aeaweb.org/aer/
More information through EDIRC

Order Information:
Web: https://www.aeaweb.org/subscribe.html

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Echevarria, Cristina, 1997. "Changes in Sectoral Composition Associated with Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 431-52, May.
  2. Luca Guerrieri & Dale W. Henderson & Jinill Kim, 2005. "Investment-specific and multifactor productivity in multi-sector open economies: data and analysis," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 828, Board of Governors of the Federal Reserve System (U.S.).
  3. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 247-274, March.
  4. Christopher Erceg & Luca Guerrieri & Christopher Gust, 2004. "Can long-run restrictions identify technology shocks?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 792, Board of Governors of the Federal Reserve System (U.S.).
  5. Scott, Andrew, 1996. "The Determinants of UK Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1409, C.E.P.R. Discussion Papers.
  6. Edge, Rochelle M. & Laubach, Thomas & Williams, John C., 2007. "Learning and shifts in long-run productivity growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2421-2438, November.
  7. Pakko Michael R., 2005. "Changing Technology Trends, Transition Dynamics, and Growth Accounting," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 5(1), pages 1-42, December.
  8. Robert E. Hall, 1997. "Macroeconomic Fluctuations and the Allocation of Time," NBER Working Papers 5933, National Bureau of Economic Research, Inc.
  9. Diego Comin & Mark Gertler, 2003. "Medium Term Business Cycles," NBER Working Papers 10003, National Bureau of Economic Research, Inc.
  10. Chari, V.V. & Kehoe, Patrick J. & McGrattan, Ellen R., 2008. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(8), pages 1337-1352, November.
  11. Lindé, Jesper, 2005. "The Effects of Permanent Technology Shocks on Labour Productivity and Hours in the RBC Model," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4827, C.E.P.R. Discussion Papers.
  12. Casey B. Mulligan, 2002. "A Century of Labor-Leisure Distortions," NBER Working Papers 8774, National Bureau of Economic Research, Inc.
  13. Bart Hobijn, 2001. "Is equipment price deflation a statistical artifact?," Staff Reports 139, Federal Reserve Bank of New York.
  14. Parkin, Michael, 1988. "A method for determining whether parameters in aggregative models are structural," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 215-252, January.
  15. Michael R. Pakko, 2001. "What happens when the technology growth trend changes?: transition dynamics, capital growth and the "new economy"," Working Papers, Federal Reserve Bank of St. Louis 2001-020, Federal Reserve Bank of St. Louis.
  16. Donald H. Dutkowsky & Barry Z. Cynamon & Barry E. Jones, 2006. "U.S. Narrow Money for the Twenty-First Century," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 44(1), pages 142-152, January.
  17. Yongsung Chang & Taeyoung Doh & Frank Schorfheide, 2006. "Non-stationary hours in a DSGE model," Working Papers 06-3, Federal Reserve Bank of Philadelphia.
  18. Dennis Hoffman & Robert H. Rasche, 1989. "Long-run Income and Interest Elasticities of Money Demand in the United States," NBER Working Papers 2949, National Bureau of Economic Research, Inc.
  19. Hafer, R.W. & Jansen, D.W., 1990. "The Demand For Money In The United States: Evidence From Cointegration Tests," Papers, Erasmus University of Rotterdam - Institute for Economic Research 9010, Erasmus University of Rotterdam - Institute for Economic Research.
  20. Richard G. Anderson, 2003. "Retail deposit sweep programs: issues for measurement, modeling and analysis," Working Papers, Federal Reserve Bank of St. Louis 2003-026, Federal Reserve Bank of St. Louis.
  21. Karl Whelan, 2001. "A two-sector approach to modeling U.S. NIPA data," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-04, Board of Governors of the Federal Reserve System (U.S.).
  22. Barnett, William A., 1980. "Economic monetary aggregates an application of index number and aggregation theory," Journal of Econometrics, Elsevier, Elsevier, vol. 14(1), pages 11-48, September.
  23. Barry Z. Cynamon & Donald H. Dutkowsky & Barry E. Jones, 2006. "Redefining the Monetary Agggregates: A Clean Sweep," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 661-672, Fall.
  24. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  25. Marquis, Milton H. & Trehan, Bharat, 2008. "On using relative prices to measure capital-specific technological progress," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(4), pages 1390-1406, December.
  26. Richard G. Anderson & Robert H. Rasche, 2001. "The remarkable stability of monetary base velocity in the United States, 1919-1999," Working Papers, Federal Reserve Bank of St. Louis 2001-008, Federal Reserve Bank of St. Louis.
  27. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  28. Chang, Yongsung & Schorfheide, Frank, 2003. "Labor-supply shifts and economic fluctuations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(8), pages 1751-1768, November.
  29. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2007. "Electoral uncertainty, fiscal policy and macroeconomic fluctuations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(3), pages 1051-1080, March.
  30. Cho, Seonghoon & Moreno, Antonio, 2006. "A Small-Sample Study of the New-Keynesian Macro Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1461-1481, September.
  31. Casey B. Mulligan & Xavier Sala-i-Martin, 2000. "Extensive Margins and the Demand for Money at Low Interest Rates," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(5), pages 961-991, October.
  32. David N. DeJong & Beth F. Ingram & Charles H. Whiteman, 2000. "Keynesian impulses versus Solow residuals: identifying sources of business cycle fluctuations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(3), pages 311-329.
  33. James A. Kahn & Robert Rich, 2003. "Tracking the new economy: using growth theory to detect changes in trend productivity," Staff Reports 159, Federal Reserve Bank of New York.
  34. John M. Roberts, 2001. "Estimates of the productivity trend using time-varying parameter techniques," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-08, Board of Governors of the Federal Reserve System (U.S.).
  35. Miles S. Kimball & John G. Fernald & Susanto Basu, 2006. "Are Technology Improvements Contractionary?," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1418-1448, December.
  36. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
  37. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
  38. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  39. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  40. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(1), pages 29-47, February.
  41. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 165-93, January.
  42. Neville Francis & Valerie A. Ramey, 2002. "Is the Technology-Driven Real Business Cycle Hypothesis Dead?," NBER Working Papers 8726, National Bureau of Economic Research, Inc.
  43. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 768, Board of Governors of the Federal Reserve System (U.S.).
  44. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
  45. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  46. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
  47. Robert J. Gordon, 2000. "Does the "New Economy" Measure Up to the Great Inventions of the Past?," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 49-74, Fall.
  48. Huffman, Gregory W. & Wynne, Mark A., 1999. "The role of intratemporal adjustment costs in a multisector economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(2), pages 317-350, April.
  49. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 3-16, January.
  50. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
  51. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 71, pages 219.
  52. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  53. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 15(1), pages 5-41, January.
  54. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 24(10), pages 1405-1423, September.
  55. Rasche, Robert H., 1987. "M1 -- Velocity and money-demand functions: Do stable relationships exist?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 27(1), pages 9-88, January.
  56. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  57. Jonas D. M. Fisher, 2002. "Technology shocks matter," Working Paper Series, Federal Reserve Bank of Chicago WP-02-14, Federal Reserve Bank of Chicago.
  58. John G. Fernald, 2005. "Trend breaks, long-run restrictions, and the contractionary effects of technology improvements," Working Paper Series 2005-21, Federal Reserve Bank of San Francisco.
  59. Richard G. Anderson, 2003. "Some tables of historical U.S. currency and monetary aggregates data," Working Papers, Federal Reserve Bank of St. Louis 2003-006, Federal Reserve Bank of St. Louis.
  60. Whelan, Karl, 2004. "New Evidence on Balanced Growth, Stochastic Trends, and Economic Fluctations," Research Technical Papers 7/RT/04, Central Bank of Ireland.
  61. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 783-820, July.
  62. Robert H. Rasche, 1990. "Demand functions for measures of U.S. money and debt," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 113-172.
  63. Bencivenga, Valerie R, 1992. "An Econometric Study of Hours and Output Variation with Preference Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 449-71, May.
  64. Dutkowsky, Donald H & Cynamon, Barry Z, 2003. " Sweep Programs: The Fall of M1 and Rebirth of the Medium of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(2), pages 263-79, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. On the Welfare Cost of Inflation and the Recent Behavior of Money Demand (AER 2009) in ReplicationWiki

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:99:y:2009:i:3:p:1040-52. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.