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Measuring The Welfare Cost Of Inflation In South Africa

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  • Rangan Gupta
  • Josine Uwilingiye

Abstract

In this paper, we estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for the period of 1965:02 to 2007:01, and in turn use the relationship to obtain welfare cost estimates of inflation. Using the Johansen technique, we estimate a log-log specification and a semi-log model of the above relationship. Based on the fits of the specifications, we decided to rely more on the welfare cost measure obtained under the log-log money demand model. Our estimates suggest that the welfare cost of inflation for South Africa ranges between 0.34% and 0.67% of GDP, for a band of 3-6% of inflation. Thus, it seems that the South African Reserve Bank's current inflation target band of 3-6% is not too poorly designed in terms of welfare. Copyright (c) 2008 The Authors. Journal compilation (c) Economic Society of South Africa 2008.

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Bibliographic Info

Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 76 (2008)
Issue (Month): 1 (03)
Pages: 16-25

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Handle: RePEc:bla:sajeco:v:76:y:2008:i:1:p:16-25

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Cited by:
  1. Eliphas Ndou & Nombulelo Gumata & Mthuli Ncube & Eric Olson, 2013. "Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa," Working Paper Series 992, African Development Bank.
  2. Andrew Phiri, 2012. "Threshold effects and inflation persistence in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(3), pages 247-269, August.
  3. Steven F. Koch & Adel Bosch, 2009. "Inflation and the Household: Towards a Measurement of the Welfare Costs of Inflation," Working Papers 200917, University of Pretoria, Department of Economics.

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