On the Welfare Cost of Inflation and the Recent Behavior of Money Demand

Peter Ireland ()

No 662, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity of 1.79. Integrating under this money demand curve yields estimates of the welfare cost of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.

Keywords: inflation; welfare cost; money demand; Friedman rule (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-04-20
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Published, American Economic Review, June 2009

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Related works:
Working Paper: On the Welfare Cost of Inflation and the Recent Behavior of Money Demand (2008)
Journal Article: On the Welfare Cost of Inflation and the Recent Behavior of Money Demand (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:662

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