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Some Benefits of Reducing Inflation in South Africa

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Author Info

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Josine Uwilingiye

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper evaluates the welfare gain from reducing inflation permanently from two percent to price stability and compares it the output cost associate with this transition. The paper emphasizes the distortions caused by the interaction of inflation and capital income taxation, in calculating the gain from moving to a zero rate of inflation. Though the annual deadweight loss of a two percent inflation rate is 0.225 percent of GDP - a relatively small number when compared to the literature, since the real gain from shifting to price stability grows in perpetuity at the rate of growth of GDP, the present value is a substantial multiple of the annual welfare gain. Calculations reveal a present value gain of 15 percent of GDP. Since the corresponding one-off output cost of moving from two percent inflation to price stability is 0.034 percent of GDP, the gain outweighs the cost by an overwhelming margin.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200915.

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Length: 15 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:pre:wpaper:200915

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Keywords: Inflation; Non-Indexed Tax System; Welfare Cost;

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Cited by:
  1. Phiri, Andrew, 2013. "An Inquisition into Bivariate Threshold Effects in The Inflation-Growth Correlation: Evaluating South Africa’s Macroeconomic Objectives," MPRA Paper 52094, University Library of Munich, Germany.

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