Welfare costs of inflation and the circulation of US currency abroad
AbstractEmpirical 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
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1326.
Date of creation: Apr 2011
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Other versions of this item:
- Calza Alessandro & Zaghini Andrea, 2011. "Welfare Costs of Inflation and the Circulation of U.S. Currency Abroad," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-21, May.
- Alessandro Calza & Andrea Zaghini, 2011. "Welfare costs of inflation and the circulation of US currency abroad," Temi di discussione (Economic working papers) 812, Bank of Italy, Economic Research and International Relations Area.
- Alessandro Calza & Andrea Zaghini, 2011. "Welfare costs of inflation and the circulation of U. S. currency abroad," Globalization and Monetary Policy Institute Working Paper 78, Federal Reserve Bank of Dallas.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-23 (All new papers)
- NEP-CBA-2011-04-23 (Central Banking)
- NEP-MON-2011-04-23 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- 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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