The Welfare Cost of Inflation and Stability of Money Demand

Abstract

The cost of the FED maintaining a low target level of inflation is measured by Lucas (2000) and Ireland (2009) as the welfare cost of inflation based on money demand. Their estimates require stability of the money demand function. Ireland finds that money demand in the post-Volcker period is surprisingly stable, but the introduction of new time series datacasts doubt on the stability of money demand and therefore on the applicability of money demand based welfare cost measures of inflation to the post-Volcker period.

Keywords: Inflation, Inflation Cost

JEL Classification: E00, E31, E41