Estimates of the welfare costs of inflation based on Bailey's (1956) methodology are typically computed on the basis of aggregate money demand models. Yet, the behavior of money demand is likely to vary across sectors. As a result, the impact on welfare of changes in the inflation regime 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. In order to do so, we estimate different functional specifications of sectoral money demand models for US households and non-financial firms using flow of funds data covering four decades. We find that the benefits were significant for both households and firms.
Published in 2010 in: Journal of Money, Credit, and Banking, v. 42, 8, pp. 1663-1678
