A TIME-VARYING APPROACH OF THE US WELFARE COST OF INFLATION

Stephen Miller, Luis Martins and Rangan Gupta

Macroeconomic Dynamics, 2019, vol. 23, issue 2, 775-797

Abstract: Money-demand specifications exhibit instability, especially for long spans of data. This paper reconsiders the welfare cost of inflation for the US economy using a flexible time-varying (TV) cointegration methodology to estimate the money-demand function. We find evidence that the TV cointegration estimation provides a better fit of the actual data than a time-invariant estimation and that the throughout unitary income elasticity only exists for the log–log form over the entire sample period. Our estimate of the welfare cost of inflation for a 10% inflation rate lies in the range of 0.025–0.75% of gross domestic product (GDP) and averages 0.27%. In sum, our findings fall well within the ranges of existing studies of the welfare cost of inflation. We find that the welfare cost averages 7.4% higher during expansions than recessions for 10% inflation rate. Finally, the interest elasticity of money demand shows substantial variability over our sample period.

Date: 2019
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Working Paper: A Time-Varying Approach of the US Welfare Cost of Inflation (2014)
Working Paper: A Time-Varying Approach of the US Welfare Cost of Inflation (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:23:y:2019:i:02:p:775-797_00

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