A Time-Varying Approach of the US Welfare Cost of Inflation

31 Pages Posted: 30 May 2014 Last revised: 18 Jun 2017

See all articles by Stephen M. Miller

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Luis Filipe Martins

University Institute of Lisbon (IUL) - School of Business

Rangan Gupta

University of Pretoria - Department of Economics

Date Written: May 28, 2014

Abstract

Money demand specifications exhibits instability, especially for long spans of data. This paper reconsiders the welfare cost of inflation for the US economy using a flexible time-varying cointegration methodology to estimate the money demand function. We find evidence that the time-varying 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-percent inflation rate lies in the range of 0.025 to 0.75 percent of GDP and averages 0.27 percent. In sum, our findings fall well within the ranges of existing studies of the welfare cost of inflation. Finally, the interest elasticity of money demand shows substantial variability over our sample period.

Keywords: Money Demand Function, Welfare cost of inflation, Time-varying cointegration

JEL Classification: C32, E52, G10

Suggested Citation

Miller, Stephen M. and Martins, Luis Filipe and Gupta, Rangan, A Time-Varying Approach of the US Welfare Cost of Inflation (May 28, 2014). Macroeconomic Dynamics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2442926 or http://dx.doi.org/10.2139/ssrn.2442926

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

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HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

Luis Filipe Martins

University Institute of Lisbon (IUL) - School of Business ( email )

Dept of Quantitative Methods
Av Forcas Armadas
Lisbon, 1649-026
Portugal

HOME PAGE: http://iscte.pt/~lfsm

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

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