Consumption and the means of payment: An empirical analysis for the United Kingdom

We estimate a model of consumption and money holdings with multiple means of payment, using data for the United Kingdom. The model describes a technology for transactions, where money and credit are imperfect substitutes. It allows us to identify shocks to the transactions technology. We evaluate the value of long-term changes in the payments systems to the representative consumer, as well as the welfare cost of inflation from 1977 to 1998. The estimates allow us to evaluate the welfare costs of inflation of this period. The model also has implications for consumption-smoothing in response to monetary shocks.