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Shoe-Leather Costs Reconsidered

  • Chadha, Jagjit S
  • Haldane, Andrew G
  • Janssen, Norbert G J

R. E. Lucas (1995) has recently suggested that the 'shoe-leather' costs of inflation may amount to as much as 1 percent of GNP in the United States when moving to the Friedman optimum. The authors assess his thesis using empirical evidence for the United Kingdom over the period 1870-1994. They find support for Lucas's proposition--that interest rates should be specified in logs--as a description of money demand dynamics but not as a steady-state characterization. Although Lucas's estimates can be corroborated, a semilog interest rate specification implies smaller, though still tangible, welfare gain estimates: for example, 0.22 percent of GNP in perpetuity when moving from 6 percent to 2 percent nominal interest rates.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 447 (March)
Pages: 363-82

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Handle: RePEc:ecj:econjl:v:108:y:1998:i:447:p:363-82
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  1. Stanley Fischer & Lawrence H. Summers, 1989. "Should Nations Learn to Live With Inflation?," NBER Working Papers 2815, National Bureau of Economic Research, Inc.
  2. 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.
  3. Robert J. Shiller, 1997. "Why Do People Dislike Inflation?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 13-70 National Bureau of Economic Research, Inc.
  4. 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.
  5. Francis Breedon & Paul Fisher, 1993. "M0: Causes and Consequences," Bank of England working papers 20, Bank of England.
  6. 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.).
  7. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers 86, Bank of England.
  8. 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.
  9. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  10. 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.
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