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Welfare costs of inflation and the circulation of US currency abroad

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Author Info

  • Alessandro Calza

    ()
    (European Central Bank)

  • Andrea Zaghini

    ()
    (Bank of Italy)

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 adjusted monetary data, we show that the failure to control for currency held by non residents may lead to significantly overestimating the welfare 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.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 812.

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Date of creation: Jun 2011
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Handle: RePEc:bdi:wptemi:td_812_11

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Web page: http://www.bancaditalia.it
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Keywords: Welfare cost of inflation; flow of funds data; US currency abroad;

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References

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  1. The shoe-leather cost of inflation is minimal
    by Economic Logician in Economic Logic on 2011-05-21 14:51:00

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