TY  - JOUR
AU  - Ireland,Peter N.
TI  - On the Welfare Cost of Inflation and the Recent Behavior of Money Demand
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14098
PY  - 2008
Y2  - June 2008
UR  - http://www.nber.org/papers/w14098
L1  - http://www.nber.org/papers/w14098.pdf
N1  - Author contact info:
Peter N. Ireland
Boston College
Department of Economics
140 Commonwealth Ave.
Chestnut Hill, MA 02467-3859
Tel: 617/552-3687
Fax: 617/552-2308
E-Mail: irelandp@bc.edu
AB  - 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.
ER  -