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The Cost of Inflation

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Historically, there has been a negative relationship between interest rates and the ratio of money to nominal GDP. This means that during periods of high interest rates, like the early 1980s, individuals attempt to shed money balances that are not earning interest. The opportunity cost of money is the interest forgone by not holding funds in an interest-bearing account. It is not surprising, therefore, that between the mid-1940s, when interest rates averaged less than 1%, and the early 1980s, when they approached 15%, the ratio of M1 to GDP dropped approximately threefold.

Suggested citation: “The Cost of Inflation,” Federal Reserve Bank of Cleveland, Economic Trends, no. 98-03, pp. 05, 03.01.1998.

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