Inflation can cause costly misallocations of resources as consumers seek to protect the
purchasing power of their nominal assets. In this article, Michael R. Pakko discusses the
nature of these distortions - known as "shoe-leather" costs - in a model where the demand
for money is motivated by a "shopping-time" constraint. While the estimates of the shoe-
leather costs of long-run inflation (implied by this model) are generally consistent with
previous studies, the article goes on to show that the transition between inflation rates
can involve dynamics that alter the nature of these welfare effects. Specifically, the
benefits of a disinflation policy are mitigated by the gradual adjustment of the economy
in response to a lower inflation rate. This transition can be particularly protracted when
there is uncertainty about the credibility of the disinflation policy.
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