Reconsidering the Welfare Cost of Inflation in the US: A Nonparametric Estimation of the Nonlinear Long-Run Money Demand Equation using Projection Pursuit Regressions
This paper, first, estimates the appropriate, log-log or semi-log, linear long-run money demand relationship capturing the behavior US money demand over the period of 1980:Q1 to 2010:Q4, using the standard linear cointegration procedures found in the literature, and the corresponding nonparametric version of the same based on Projection Pursuit Regression (PPR) methods. We then, compare the resulting welfare costs of inflation obtained from the linear and nonlinear money demand cointegrating equations. We make the following observations: (i) The appropriate money demand relationship for the period of 1980:Q1 to 2010:Q4 is captured by a semi-log function, since no cointegrating relationship could be obtained for the log-log model; (ii) The semi-elasticity of interest rate obtained from the PPR method is found to be more than double the corresponding estimate obtained under the linear case; (iii) Based on the estimation of semi-log cointegrating equations, the welfare cost of inflation was found to at the most lie between 0.0131 percent of GDP to 0.2186 percent of GDP for inflation rates between 0 percent and 10 percent, and; (iv) In comparison, the welfare cost of inflation obtained from the semi-log non-linear long-run money demand function, obtained using the PPR method, for 0 to 10 percent of inflation ranges between 0.4929 to 1.9468 percent of GDP. These results suggest that the Federal Reserve’s current policy, which generates low but still positive rates of inflation, might not be an adequate approximation in terms of the welfare cost of inflation. Perhaps, moving all the way to a Friedman-type deflationary rule for a zero nominal interest is a more desired policy given the size of welfare loss.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Jun 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
Web page: http://www.up.ac.za/economics
More information through EDIRC
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.:
- 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.
- Peter N. Ireland, 2009. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," American Economic Review, American Economic Association, vol. 99(3), pages 1040-52, June.
- Peter N. Ireland, 2008. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," NBER Working Papers 14098, National Bureau of Economic Research, Inc.
- Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Whitney K. Newey & Kenneth D. West, 1986.
"A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix,"
NBER Technical Working Papers
0055, National Bureau of Economic Research, Inc.
- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
- James H. Stock & Mark W. Watson, 1991.
"A simple estimator of cointegrating vectors in higher order integrated systems,"
Working Paper Series, Macroeconomic Issues
91-3, Federal Reserve Bank of Chicago.
- Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
- 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.
- Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
- 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.
- Michael Dotsey & Peter Ireland, 1994.
"The welfare cost of inflation in general equilibrium,"
94-04, Federal Reserve Bank of Richmond.
- Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pre:wpaper:201114. 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: (Rangan Gupta)
If references are entirely missing, you can add them using this form.