On the Markov Switching Welfare Cost of Inflation
Forthcoming in: Journal of Economic Dynamics and Control
48 Pages Posted: 19 Sep 2019
Date Written: September 11, 2019
This paper uses the Markov switching approach to account for instabilities in the long-run money demand function and compute the welfare cost of inflation in the United States. In doing so, it circumvents the problem of data-mining of some earlier seminal contributions on these issues, allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function. Moreover, it extends the sample period, and investigates the robustness of results to alternative money demand specifications, monetary aggregation procedures, and assumptions regarding dynamics aspects of the money demand specification.
Keywords: Welfare Cost of Inflation, Markov Regime Switching, Divisia Money
JEL Classification: C22, E41, E52
Suggested Citation: Suggested Citation