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Shoe-Leather Costs Reconsidered

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

Abstract

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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  • Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, vol. 108(447), pages 363-382, March.
  • Handle: RePEc:ecj:econjl:v:108:y:1998:i:447:p:363-82
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    4. Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, vol. 108(447), pages 363-382, March.
    5. 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.
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    Cited by:

    1. Seitz, Franz & Fischer, Björn & Köhler, Petra, 2004. "The demand for euro area currencies: past, present and future," Working Paper Series 330, European Central Bank.
    2. 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.
    3. Franz Seitz & Julian von Landesberger, 2014. "Household Money Holdings in the Euro Area: An Explorative Investigation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 83-115, November.
    4. Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.
    5. Chadha, Jagjit S & Haldane, Andrew G & Janssen, Norbert G J, 1998. "Shoe-Leather Costs Reconsidered," Economic Journal, Royal Economic Society, vol. 108(447), pages 363-382, March.
    6. Calza, Alessandro & Zaghini, Andrea, 2009. "Nonlinearities In The Dynamics Of The Euro Area Demand For M1," Macroeconomic Dynamics, Cambridge University Press, vol. 13(01), pages 1-19, February.
    7. Hasan Bakhshi & Ben Martin & Tony Yates, 2002. "How uncertain are the welfare costs of inflation?," Bank of England working papers 152, Bank of England.
    8. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
    9. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
    10. Miguel Casares, 2004. "Price setting and the steady-state effects of inflation," Spanish Economic Review, Springer;Spanish Economic Association, vol. 6(4), pages 267-289, December.
    11. 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, April.
    12. Franz Seitz & Julian von Landesberger, 2012. "Household Money Demand: The Euro Area Case," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(III), pages 409-438, September.
    13. 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.
    14. Calza, Alessandro & Zaghini, Andrea, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series 592, European Central Bank.
    15. Miguel Casares, 2001. "Dynamic Analysis in an Optimizing Monetary Model with Transaction Costs and Endogenous Investment," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0108, Departamento de Economía - Universidad Pública de Navarra.
    16. John Ashworth & David Barlow & Lynne Evans, 2014. "Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK," Manchester School, University of Manchester, vol. 82(6), pages 732-750, December.
    17. Dumitru, Ionut, 2002. "Money Demand in Romania," MPRA Paper 10629, University Library of Munich, Germany.
    18. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.
    19. Calza, Alessandro & Zaghini, Andrea, 2010. "Sectoral money demand and the great disinflation in the US," Working Paper Series 1218, European Central Bank.
    20. 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.

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