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Welfare costs of inflation and the circulation of US currency abroad

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  • Calza, Alessandro
  • Zaghini, Andrea

Abstract

Empirical studies of the "shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for US dollars abroad, we show that the failure to control for currency held by non residents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favour of the Fed's current policy. JEL Classification: E31, E41, E52

Suggested Citation

  • Calza, Alessandro & Zaghini, Andrea, 2011. "Welfare costs of inflation and the circulation of US currency abroad," Working Paper Series 1326, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20111326
    Note: 338639
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    References listed on IDEAS

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    1. The shoe-leather cost of inflation is minimal
      by Economic Logician in Economic Logic on 2011-05-21 19:51:00

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    2. Geoffrey R. Dunbar & Casey Jones, 2018. "The (Un)Demand for Money in Canada," Staff Working Papers 18-20, Bank of Canada.
    3. Matteo Mogliani & Giovanni Urga, 2018. "On the Instability of Long‐Run Money Demand and the Welfare Cost of Inflation in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1645-1660, October.
    4. John Ashworth & David Barlow & Lynne Evans, 2014. "Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK," Manchester School, University of Manchester, vol. 82(6), pages 732-750, December.

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    More about this item

    Keywords

    flow of funds data; US currency abroad; Welfare costs of inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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