Measuring The Welfare Cost Of Inflation In South Africa
In this paper, we estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for the period of 1965:02 to 2007:01, and in turn use the relationship to obtain welfare cost estimates of inflation. Using the Johansen technique, we estimate a log-log specification and a semi-log model of the above relationship. Based on the fits of the specifications, we decided to rely more on the welfare cost measure obtained under the log-log money demand model. Our estimates suggest that the welfare cost of inflation for South Africa ranges between 0.34% and 0.67% of GDP, for a band of 3-6% of inflation. Thus, it seems that the South African Reserve Bank's current inflation target band of 3-6% is not too poorly designed in terms of welfare. Copyright (c) 2008 The Authors. Journal compilation (c) Economic Society of South Africa 2008.
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Volume (Year): 76 (2008)
Issue (Month): 1 (03)
Pages: 16-25
| Handle: | RePEc:bla:sajeco:v:76:y:2008:i:1:p:16-25 |
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