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

  • Alessandro Calza
  • Andrea Zaghini

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.

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File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2011/0078.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 78.

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Date of creation: 2011
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Handle: RePEc:fip:feddgw:78
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