Welfare costs of inflation and the circulation of US currency abroad

Alessandro Calza and Andrea Zaghini

No 1326, Working Paper Series from European Central Bank

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

Keywords: flow of funds data; US currency abroad; Welfare costs of inflation (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cba and nep-mon
Note: 338639
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad (2011)
Working Paper: Welfare costs of inflation and the circulation of US currency abroad (2011)
Working Paper: Welfare costs of inflation and the circulation of U. S. currency abroad (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111326

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