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Inflation and the Household: Towards a Measurement of the Welfare Costs of Inflation

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  • Steven F. Koch

    ()
    (Department of Economics, University of Pretoria)

  • Adel Bosch

    ()
    (South African Reserve Bank, Pretoria, South Africa)

Abstract

This paper considers household expenditure patterns through the estimation of parametric share estimates. The parameters from these expenditure share estimates are then used to simulate the underlying income transfer (compensating variation) that would be required to offset price increases for various goods. The simulations are considered across the expenditure distribution to provide a series of estimates of the welfare effects of inflation on both poor and non-poor households. Given data limitations, preventing the estimation of substitution effects, non-poor households generally bear the brunt of inflation, primarily due to their larger expenditures. The only exception to the aforementioned generalisation is the impact that food inflation has on low expenditure households relative to high expenditure households. The results in this paper are consistent with the expectation that food inflation has a larger welfare cost to poor households than it does for non-poor households, and we are able to present an estimate of those welfare cost differences.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200917.

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Length: 54 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:pre:wpaper:200917

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Keywords: Almost ideal demand system; Compensating variation; Nonparametric density;

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References

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