Inflation shoe leather costs and average inflation rates across countries

Cross-country differences in average inflation rates among 30 countries are well explained by differences in estimated “shoe leather” cost functions relating these costs to the inflation tax. The shoe leather costs are estimated by means of the standard Cagan, semi-log demand for real balances modified to take account of variations in reserve ratios and the effects of these variations on the demand for the monetary base. The results are consistent with optimization on the part of an efficient government theory but are not adequate to discriminate between efficient government models and many others for which shoe leather costs play at least a substantial role in policy-makers' decisions. The imposition of the semi-log form does not seem critical in arriving at these conclusions, although this form tends to produce more reasonable-looking Laffer surfaces than more flexible forms.