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On the Instability of Long‐Run Money Demand and the Welfare Cost of Inflation in the United States

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  • MATTEO MOGLIANI
  • GIOVANNI URGA

Abstract

We evaluate the policy implications of measuring the welfare cost of inflation accounting for instabilities in the long‐run money demand for the United States over the period 1900–2013. We extend the analysis and reassess the results reported in Lucas (2000) and Ireland (2009), also considering the recent theoretical contributions of Lucas and Nicolini (2015) and Berentsen, Huber, and Marchesiani (2015). Breaks in the long‐run money demand give rise to regime‐dependent welfare cost estimates. We find that the welfare cost is about 0.1% of annual income over 1976–2013, as compared to 0.8% over 1945–75. Overall, these values are substantially lower than those reported in the literature.

Suggested Citation

  • Matteo Mogliani & Giovanni Urga, 2018. "On the Instability of Long‐Run Money Demand and the Welfare Cost of Inflation in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1645-1660, October.
  • Handle: RePEc:wly:jmoncb:v:50:y:2018:i:7:p:1645-1660
    DOI: 10.1111/jmcb.12480
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