On the Welfare Cost of Inflation and the Recent Behavior of Money Demand
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NBER Working Paper No. 14098
Issued in June 2008
NBER Program(s): ME
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 below 2. Integrating under this money demand curve yields estimates of the welfare costs 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.
Published: 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.
This paper is available as PDF (289 K) or via email.
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