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Measuring the Welfare Cost of Inflation in South Africa: A Reconsideration

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  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Josine Uwilingiye

    ()
    (Department of Economics, University of Pretoria)

Abstract

In this paper, using the Fisher and Seater (1993) long-horizon approach, we estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for South Africa over the period of 1965:02 to 2007:01, and, in turn, use the obtained estimates of the interest elasticity and the semi-elasticity to derive the welfare cost estimates of inflation, using both Bailey’s (1956) consumer surplus approach, as well, as Lucas’s (2000) compensating variation approach. When, the results are compared to welfare cost estimates obtained recently by Gupta and Uwilingiye (2008), using the same data set, but based on Johansen’s (1991, 1995) cointegration technique, the values are less by more than half in size than those obtained in the latter study, with the same being utmost ranging between 0.16 percent to 0.36 percent of GDP for the target-band of 3 percent to 6 percent of inflation. The paper, thus, highlights the fact that welfare cost estimates of inflation are sensitive to the methodology used to estimate the long-run equilibrium money demand relationships.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200809.

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Length: 9 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:pre:wpaper:200809

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Keywords: Long Horizon Regression; Money Demand; Welfare Cost of Inflation;

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