Measuring the Welfare Cost of Inflation in South Africa
AbstractIn 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 (1991, 1995) 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 percent and 0.67 percent of GDP, for a band of 3 to 6 percent of inflation. Thus, it seems that the SARB’s current inflation target band of 3-6 percent is not too poorly designed in terms of welfare.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200804.
Length: 10 pages
Date of creation: Mar 2008
Date of revision:
Cointegration; Money Demand; Welfare Cost of Inflation;
Other versions of this item:
- Rangan Gupta & Josine Uwilingiye, 2008. "Measuring The Welfare Cost Of Inflation In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 76(1), pages 16-25, 03.
- Rangan Gupta & Josine Uwilingiye, 2008. "Measuring the welfare cost of inflation in South Africa," Working Papers 68, Economic Research Southern Africa.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rangan Gupta).
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