Chadha, Jagjit S.; Haldane, Andrew G.; Janssen, Norbert G. J.
March 1998
Economic Journal;Mar98, Vol. 108 Issue 447, p363
Academic Journal
Lucas has recently suggested that the `shoe-leather' costs of inflation may amount to as much as 1% of GNP in the United States when moving to the Friedman optimum. We assess his thesis using empirical evidence for the United Kingdom over the period 1870-1994. We find support for Lucas' proposition - that interest rates should be specified in logs - as a description of money demand dynamics, but not as a steady-state characterisation. Although Lucas' estimates can be corroborated, a semilog interest rate specification implies smaller, though still tangible, welfare gain estimates: for example, 0.22% of GNP in perpetuity when moving from 6% to 2% nominal interest rates.


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