Miller, Stephen M.Martins, Luis FilipeGupta, Rangan2019-05-282019-05-282019-03Miller, S.M., Martins, L.F. & Gupta, R. 2019, 'A time-varying approach of the US welfare cost of inflation', Macroeconomic Dynamics, vol. 23, no. 2, pp. 775-797.1365-1005 (print)1469-8056 (online)10.1017/S1365100517000037http://hdl.handle.net/2263/69219Money-demand specifications exhibit instability, especially for long spans of data. This paper reconsiders the welfare cost of inflation for the US economy using a flexible time-varying (TV) cointegration methodology to estimate the money-demand function. We find evidence that the TV cointegration estimation provides a better fit of the actual data than a time-invariant estimation and that the throughout unitary income elasticity only exists for the log–log form over the entire sample period. Our estimate of the welfare cost of inflation for a 10% inflation rate lies in the range of 0.025–0.75% of gross domestic product (GDP) and averages 0.27%. In sum, our findings fall well within the ranges of existing studies of the welfare cost of inflation. We find that the welfare cost averages 7.4% higher during expansions than recessions for 10% inflation rate. Finally, the interest elasticity of money demand shows substantial variability over our sample period.en© Cambridge University Press 2017Money demandCurvatureMonetary policyCointegrationEndogenous growth (Economics)United States (US)Error correctionWelfare cost of inflationTime-varying cointegrationPostprint Article