(i)  Distortions to cash balances  Money - notes and coin - may no longer, as Sally Bowles claimed, make the world go round, but, even in a world of plastic, it oils the wheels of transactions. Cash still accounts for a large number of transactions, albeit a smaller fraction of the value of all transactions. The opportunity cost of holding cash is the interest rate on deposits. Inflation raises nominal interest rates and hence this cost. So agents economise on their real money balances, and incur additional costs in the form of more frequent trips to the cash dispenser - the so-called ‘shoe-leather costs’ of inflation. The traditional view was that these costs could be measured by the area under the money demand curve. Such estimates were typically small, and left researchers wondering if the costs of inflation were really all that important. But high inflation rates can affect more than just money demand. If agents economise on money balances, transactions costs may rise in markets for goods, labour and assets. As argued by Hahn (1965) and more recently articulated by Wallace (2001), many monetary models contain hidden inconsistencies in the sense that they ignore the credit or trade frictions - in particular, imperfect  BIS Review 68/2002  11  monitoring and enforceability - that give to money an essential role in the first place. To assess the welfare implications of inflation we need a theoretical framework that takes seriously the role of money in all these transactions.
In fact, this strategy is known as the Greenspan put, in reference to interest rate reductions in the aftermaths of severe financial turmoil, such as the stock exchange downfall of 1987, the collapse of LTCM in 1998, or the technological stocks in the early 2000s. 7 In fact, from the standpoint of liquidity provision and potential downward pressures on inflation, a reduction in interest rates is generally recommended. The problem is that this response provides an incentive to adopting more risk-prone behavior, since investors perceive that they will have the put option available later. Therefore, it is advisable to not only provide the liquidity, but also carefully monitor the market’s operation to prevent overexposure to these risks in the future. Indeed it can be argued that bubbles are difficult to identify. For example, Gürkaynak (2005) finds that, for every work identifying a bubble, there is another one finding the opposite. At the same time, it is not so clear how much of a given bubble can be affected by raising the interest rate and the necessary magnitude of the adjustment in order to make any difference, because, by definition, a bubble is determined by “non-fundamental” price movements. Thus, although after seeing the critical situation that developed financial markets have been enduring, a more proactive monetary policy strategy might have been advisable, but it is hard to believe that such a strategy could have averted this crisis by itself.