Welfare costs of inflation and the circulation of U. S. currency abroad

Alessandro Calza and Andrea Zaghini

No 78, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

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 U.S. dollars abroad, we show that the failure to control for currency held by nonresidents 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 favor of the Fed's current policy.

JEL-codes: E31 E41 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: Published as: Calza, Alessandro and Andrea Zaghini (2011), "Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad," The B.E. Journal of Macroeconomics: Topics in Macroeconomics 2011 (1), Article 12.
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Citations: View citations in EconPapers (3)

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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 US currency abroad (2011)
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