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Time Aggregation, Long-Run Money Demand and the Welfare Cost of Inflation

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  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Josine Uwilingiye

    () (Department of Economics, University of Pretoria)

Abstract

Two recent studies have found markedly different measures of the welfare cost of inflation in South Africa, obtained through the estimation of long-run money demand relationships using cointegration and long-horizon approaches. Realizing that the monetary aggregate and the interest rate variables are available at higher frequencies than the measure of income and that long-run properties of data are unaffected under alternative methods of time aggregation, we test for the robustness of the two estimation procedures under temporal aggregation and systematic sampling. Our results indicate that the long-horizon method is more robust to alternative methods of time aggregation, and, given this the welfare cost of inflation in South Africa for an inflation target band of 3 percent to 6 percent lies between 0.15 percent and 0.41 percent.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200825.

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Length: 14 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:pre:wpaper:200825

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Keywords: Cointegration; Long-Horizon Regression; Money Demand; Time Aggregation; Welfare Cost of Inflation.;

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