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Sectoral money demand and the great disinflation in the US


  • Alessandro Calza

    () (European Central Bank)

  • Andrea Zaghini

    () (Bank of Italy)


Estimates of the welfare costs of inflation based on Bailey's (1956) methodology are typically computed on the basis of aggregate money demand models. Yet, the behavior of money demand is likely to vary across sectors. As a result, the impact on welfare of changes in the inflation regime 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. In order to do so, we estimate different functional specifications of sectoral money demand models for US households and non-financial firms using flow of funds data covering four decades. We find that the benefits were significant for both households and firms.

Suggested Citation

  • Alessandro Calza & Andrea Zaghini, 2011. "Sectoral money demand and the great disinflation in the US," Temi di discussione (Economic working papers) 785, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_785_11

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    References listed on IDEAS

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    Cited by:

    1. Calza Alessandro & Zaghini Andrea, 2011. "Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-21, May.
    2. John Ashworth & David Barlow & Lynne Evans, 2014. "Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK," Manchester School, University of Manchester, vol. 82(6), pages 732-750, December.
    3. Franz Seitz & Julian von Landesberger, 2014. "Household Money Holdings in the Euro Area: An Explorative Investigation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 83-115, November.
    4. Afsin Sahin, 2013. "Estimating Money Demand Function by a Smooth Transition Regression Model: An Evidence for Turkey," Working Papers 791, Economic Research Forum, revised Nov 2013.
    5. 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.
    6. Zaghini, Andrea & Bencivelli, Lorenzo, 2012. "Financial innovation, macroeconomic volatility and the great moderation," MPRA Paper 41263, University Library of Munich, Germany.

    More about this item


    welfare cost of inflation; flow of funds data; demand for money;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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