Shoe-Leather Costs in the Euro Area and the Foreign Demand for Euro Banknotes
20 Pages Posted: 10 Jul 2015
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Shoe-Leather Costs in the Euro Area and the Foreign Demand for Euro Banknotes
Date Written: July 9, 2015
Abstract
We estimate the shoe-leather costs of inflation in the euro area using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe-leather costs for very low levels of the nominal interest rate, our estimates suggest that the shoe-leather costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, in the euro area the inflation tax is still predominantly borne by domestic agents, with transfers of resources from abroad remaining small.
Keywords: money demand, welfare cost of inflation, currency abroad, euro
JEL Classification: E41, C22
Suggested Citation: Suggested Citation