Sectoral Money Demand Behaviour and the Welfare Cost of Inflation in the UK

In this paper, we estimate separate UK money demand functions for the household and corporate sectors; and calculate estimates of the welfare cost of inflation. We find that the household sector bears most of the welfare burden which is in sharp contrast to previous (US) evidence. Also, we find aggregate welfare cost estimates that are much smaller than previous (largely US) estimates—sufficiently smaller as to challenge the oft-quoted Lucas finding that shoe leather costs are by no means trivial. For the UK, we find welfare costs no greater than one tenth of a per cent of real income.