Measuring the Welfare Cost of Inflation in South Africa: A Reconsideration
AbstractIn 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 InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200809.
Length: 9 pages
Date of creation: Jun 2008
Date of revision:
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
This paper has been announced in the following NEP Reports:
- NEP-AFR-2008-09-29 (Africa)
- NEP-ALL-2008-09-29 (All new papers)
- NEP-CBA-2008-09-29 (Central Banking)
- NEP-MAC-2008-09-29 (Macroeconomics)
- NEP-MON-2008-09-29 (Monetary Economics)
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