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Sectoral Money Demand and the Great Disinflation in the United States


  • We are grateful to editor Masao Ogaki and to Giuseppe Grande, Paul Kramp, Qiang Li, Francesco Lippi, and an anonymous referee for many interesting suggestions and comments. The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of Banca d’Italia or the European Central Bank.


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.