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Shoe-leather costs in the euro area and the foreign demand for euro banknotes

Author

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  • Alessandro Calza

    (ECB)

  • Andrea Zaghini

    (Bank of Italy)

Abstract

We estimate the shoe leather costs of inflation in the euro area by using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe leather costs for very low nominal interest rates, our estimates suggest that these costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, inflation tax is still predominantly borne by domestic agents in the euro area, with transfers of resources from abroad remaining small.

Suggested Citation

  • Alessandro Calza & Andrea Zaghini, 2015. "Shoe-leather costs in the euro area and the foreign demand for euro banknotes," Temi di discussione (Economic working papers) 1039, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1039_15
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    More about this item

    Keywords

    money demand; welfare cost of inflation; currency abroad; euro banknotes;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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