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Shoe-leather costs reconsidered

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  • Jag Chadha
  • Andrew Haldane
  • Norbert Janssen

Abstract

It has recently been suggested by Robert Lucas that `shoe-leather' costs of inflation may amount to as much as 1% of GNP in the United States. This paper assesses the UK evidence for the period 1970-1994. Similar estimates to those of Lucas are found using his original specification, but a preferred functional form using a semi-log interest elasticity of demand for money reveals a 0.22 % of GNP gain in perpetuity following a sustained fall in nominal interest rates from 6% to 2%.

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Paper provided by Bank of England in its series Bank of England working papers with number 86.

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Date of creation: Oct 1998
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Handle: RePEc:boe:boeewp:86

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  1. Tower, Edward, 1971. "More on the Welfare Cost of Inflationary Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(4), pages 850-60, November.
  2. Francis Breedon & Paul Fisher, 1993. "M0: Causes and Consequences," Bank of England working papers 20, Bank of England.
  3. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers 86, Bank of England.
  4. C.W.J. Granger & Jeff Hallman, 1988. "The algebra of I (1)," Finance and Economics Discussion Series 45, Board of Governors of the Federal Reserve System (U.S.).
  5. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  6. Robert J. Shiller, 1996. "Why Do People Dislike Inflation?," Cowles Foundation Discussion Papers 1115, Cowles Foundation for Research in Economics, Yale University.
  7. Max Gillman, 1995. "Comparing Partial And General Equilibrium Estimates Of The Welfare Cost Of Inflation," Contemporary Economic Policy, Western Economic Association International, vol. 13(4), pages 60-71, October.
  8. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
  9. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
  10. Stanley Fischer & Lawrence H. Summers, 1989. "Should Nations Learn to Live With Inflation?," NBER Working Papers 2815, National Bureau of Economic Research, Inc.
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  1. Not Brixton, Barking
    by chris dillow in Stumbling and Mumbling on 2009-09-18 13:20:39
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Cited by:
  1. Willem H. Buiter & Nikolaos Panigirtzoglou, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," NBER Working Papers 7245, National Bureau of Economic Research, Inc.
  2. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
  3. Miguel Casares, 2004. "Price setting and the steady-state effects of inflation," Spanish Economic Review, Springer, vol. 6(4), pages 267-289, December.
  4. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
  5. Seitz, Franz & von Landesberger, Julian, 2010. "Household money holdings in the euro area: An explorative investigation," Working Paper Series 1238, European Central Bank.
  6. Alexander L. Wolman, 1997. "Zero inflation and the Friedman rule: a welfare comparison," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
  7. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October.
  8. Hasan Bakhshi & Ben Martin & Tony Yates, 2002. "How uncertain are the welfare costs of inflation?," Bank of England working papers 152, Bank of England.
  9. Miguel Casares, 2007. "The New Keynesian Model and the Euro Area Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 209-244, 04.
  10. Calza, Alessandro & Zaghini, Andrea, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series 0592, European Central Bank.
  11. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers 86, Bank of England.
  12. Rodriguez-Palenzuela, Diego & Camba-Méndez, Gonzalo & García, Juan Angel, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 0278, European Central Bank.
  13. Dumitru, Ionut, 2002. "Money Demand in Romania," MPRA Paper 10629, University Library of Munich, Germany.
  14. Alessandro Calza & Andrea Zaghini, 2011. "Sectoral money demand and the great disinflation in the US," Temi di discussione (Economic working papers) 785, Bank of Italy, Economic Research and International Relations Area.
  15. Fischer, Björn & Köhler, Petra & Seitz, Franz, 2004. "The demand for euro area currencies: past, present and future," Working Paper Series 0330, European Central Bank.
  16. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.

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