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On the Instability of Long‐Run Money Demand and the Welfare Cost of Inflation in the United States
Author(s) -
MOGLIANI MATTEO,
URGA GIOVANNI
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12480
Subject(s) - economics , inflation (cosmology) , welfare , demand for money , monetary economics , keynesian economics , macroeconomics , monetary policy , market economy , physics , theoretical physics
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.