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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. Robert J. Shiller, 1996. "Why Do People Dislike Inflation?," NBER Working Papers 5539, National Bureau of Economic Research, Inc.
  2. 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.
  3. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 15(1), pages 5-41, January.
  4. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper, Federal Reserve Bank of Richmond 94-04, Federal Reserve Bank of Richmond.
  5. Tower, Edward, 1971. "More on the Welfare Cost of Inflationary Finance," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 3(4), pages 850-60, November.
  6. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 64(4), pages 371-87, December.
  7. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers 86, Bank of England.
  8. Stanley Fischer & Lawrence H. Summers, 1989. "Should Nations Learn to Live With Inflation?," NBER Working Papers 2815, National Bureau of Economic Research, Inc.
  9. 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.
  10. C.W.J. Granger & Jeff Hallman, 1988. "The algebra of I (1)," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 45, Board of Governors of the Federal Reserve System (U.S.).
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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. Buiter, Willem H & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers.
  2. Fischer, Björn & Köhler, Petra & Seitz, Franz, 2004. "The demand for euro area currencies: past, present and future," Working Paper Series, European Central Bank 0330, European Central Bank.
  3. 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, Royal Economic Society, vol. 113(490), pages 723-746, October.
  4. Rodriguez-Palenzuela, Diego & Camba-Méndez, Gonzalo & García, Juan Angel, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series, European Central Bank 0278, European Central Bank.
  5. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
  6. Calza, Alessandro & Zaghini, Andrea, 2010. "Sectoral money demand and the great disinflation in the US," Working Paper Series, European Central Bank 1218, European Central Bank.
  7. Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(447), pages 363-82, March.
  8. Alexander L. Wolman, 1997. "Zero inflation and the Friedman rule: a welfare comparison," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
  9. Dumitru, Ionut, 2002. "Money Demand in Romania," MPRA Paper 10629, University Library of Munich, Germany.
  10. Seitz, Franz & von Landesberger, Julian, 2010. "Household money holdings in the euro area: An explorative investigation," Working Paper Series, European Central Bank 1238, European Central Bank.
  11. Calza, Alessandro & Zaghini, Andrea, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series, European Central Bank 0592, European Central Bank.
  12. Miguel Casares, 2004. "Price setting and the steady-state effects of inflation," Spanish Economic Review, Springer, Springer, vol. 6(4), pages 267-289, December.
  13. Bakhshi, Hasan & Ben Martin & Tony Yates, 2002. "How uncertain are the welfare costs of inflation?," Royal Economic Society Annual Conference 2002, Royal Economic Society 12, Royal Economic Society.
  14. 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.
  15. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(457), pages 492-508, July.
  16. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series, European Central Bank 0079, European Central Bank.

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