Sectoral Money Demand and the Great Disinflation in the United States |
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Authors: | ALESSANDRO CALZA ANDREA ZAGHINI |
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Institution: | 1. Alessandro Calza is at the European Central Bank (E‐mail: alessandro.calza@ecb.europa.eu).;2. Andrea Zaghini is at the Research Department of Banca d’Italia (E‐mail: andrea.zaghini@bancaditalia.it). |
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Abstract: | Estimates of the welfare costs of inflation based on Bailey (1956) are typically computed using aggregate money demand models. Yet, the behavior of money demand may vary across sectors. Thus, the impact on welfare of inflation regime shifts may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. For this purpose, we estimate different functional specifications of money demand for U.S. households and nonfinancial firms using flow‐of‐fund data covering four decades. We find that the benefits were significant for both sectors. |
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Keywords: | E31 E41 welfare cost of inflation flow‐of‐funds data demand for money |
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