No. 1039 - Shoe-leather costs in the euro area and the foreign demand for euro banknotes

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by Alessandro Calza and Andrea Zaghini November 2015

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.

Published in 2016 in: International Journal of Central Banking, v. 12, 1, pp. 231-246

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