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, 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, Economic Research Southern Africa 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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- Andrew Phiri, 2012. "Threshold effects and inflation persistence in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing, Emerald Group Publishing, vol. 4(3), pages 247-269, August.
- Steven F. Koch & Adel Bosch, 2009. "Inflation and the Household: Towards a Measurement of the Welfare Costs of Inflation," Working Papers, University of Pretoria, Department of Economics 200917, University of Pretoria, Department of Economics.
- 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, African Development Bank 992, African Development Bank.
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