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

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Author Info
Rangan Gupta () (Department of Economics, University of Pretoria)
Josine Uwilingiye () (Department of Economics, University of Pretoria)

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

Find related papers by JEL classification:
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Lucas, Robert E., 1981. "Discussion of : Stanley Fischer, "towards an understanding of the costs of inflation: II"," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 43-52, January. [Downloadable!] (restricted)
  2. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January. [Downloadable!] (restricted)
  3. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219. [Downloadable!] (restricted)
  4. Apostolos Serletis & Kazem Yavari, 2005. "The welfare cost of inflation in Italy," Applied Economics Letters, Taylor and Francis Journals, vol. 12(3), pages 165-168, February. [Downloadable!] (restricted)
  5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
  6. Rangan Gupta & Josine Uwilingiye, 2008. "Measuring the Welfare Cost of Inflation in South Africa," Working Papers 200804, University of Pretoria, Department of Economics.
    Other versions:
  7. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  8. Serletis, Apostolos & Yavari, Kazem, 2004. "The welfare cost of inflation in Canada and the United States," Economics Letters, Elsevier, vol. 84(2), pages 199-204, August. [Downloadable!] (restricted)
  9. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February. [Downloadable!] (restricted)
    Other versions:
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