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Sectoral money demand and the great disinflation in the US

  • Calza, Alessandro
  • Zaghini, Andrea

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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  1. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  2. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
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  4. Jain, Parul & Moon, Choon-Geol, 1994. "Sectoral Money Demand: A Co-integration Approach: Errata," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 776, November.
  5. Jain, Parul & Moon, Choon-Geol, 1994. "Sectoral Money Demand: A Co-integration Approach," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 196-202, February.
  6. 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.
  7. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  8. Butkiewicz, James L. & McConnell, Margaret Mary, 1995. "The stability of the demand for money and M1 velocity: Evidence from the sectoral data," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(3), pages 233-243.
  9. 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.
  10. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
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  12. Peter N. Ireland, 2007. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," Boston College Working Papers in Economics 662, Boston College Department of Economics.
  13. 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, vol. 44(1), pages 142-152, January.
  14. Richard G. Anderson, 2003. "Retail deposit sweep programs: issues for measurement, modeling and analysis," Working Papers 2003-026, Federal Reserve Bank of St. Louis.
  15. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219.
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  17. Choi, Chi-Young & Hu, Ling & Ogaki, Masao, 2008. "Robust estimation for structural spurious regressions and a Hausman-type cointegration test," Journal of Econometrics, Elsevier, vol. 142(1), pages 327-351, January.
  18. 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, vol. 35(2), pages 263-79, April.
  19. 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, vol. 108(5), pages 961-991, October.
  20. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
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