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Sectoral money demand and the great disinflation in the US

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  • Calza, Alessandro
  • Zaghini, Andrea

Abstract

Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional specifications of money demand for US households and non-financial firms using flow-of-fund data covering four decades. We find that the benefits were significant for both sectors. JEL Classification: E31, E41

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Paper provided by European Central Bank in its series Working Paper Series with number 1218.

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Date of creation: Jun 2010
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Handle: RePEc:ecb:ecbwps:20101218

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Keywords: ‡ow of funds data; demand for money; welfare cost of in‡ation;

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Cited by:
  1. Zaghini, Andrea & Bencivelli, Lorenzo, 2012. "Financial innovation, macroeconomic volatility and the great moderation," MPRA Paper 41263, University Library of Munich, Germany.
  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. Luca Sessa, 2012. "Economic (in)stability under monetary targeting," Temi di discussione (Economic working papers) 858, Bank of Italy, Economic Research and International Relations Area.

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