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Measuring the Welfare Cost of Inflation in South Africa

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  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Josine Uwilingiye

    (Department of Economics, University of Pretoria)

Abstract

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 (1991, 1995) 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 percent and 0.67 percent of GDP, for a band of 3 to 6 percent of inflation. Thus, it seems that the SARB’s current inflation target band of 3-6 percent is not too poorly designed in terms of welfare.

Suggested Citation

  • Rangan Gupta & Josine Uwilingiye, 2008. "Measuring the Welfare Cost of Inflation in South Africa," Working Papers 200804, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:200804
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    References listed on IDEAS

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    1. Peter N. Ireland, 2009. "On the Welfare Cost of Inflation and the Recent Behavior of Money Demand," American Economic Review, American Economic Association, vol. 99(3), pages 1040-1052, June.
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    3. Richard G. Anderson & Robert H. Rasche, 2001. "The remarkable stability of monetary base velocity in the United States, 1919-1999," Working Papers 2001-008, Federal Reserve Bank of St. Louis.
    4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    5. Kirsten L. Ludi & Marc Ground, 2006. "Investigating the Bank-Lending Channel in South Africa: A VAR Approach," Working Papers 200604, University of Pretoria, Department of Economics.
    6. David F. Hendry & Katarina Juselius, 2001. "Explaining Cointegration Analysis: Part II," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 75-120.
    7. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    8. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
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    Cited by:

    1. Zia-Ur- Rahman, 2019. "Influence of Excessive Expenditure of the Government in Perspective of Interest Rate and Money Circulation Which in Turn Affects the Growing Process in Pakistan," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 6(2), pages 120-129.
    2. Andrew Phiri, 2012. "Threshold effects and inflation persistence in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(3), pages 247-269, July.
    3. Eliphas Ndou & Nombulelo Gumata & Mthuli Ncube & Eric Olson, 2013. "Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa," Working Paper Series 992, African Development Bank.
    4. Lumengo Bonga-Bonga & Ntsakeseni Letitia Lebese, 2019. "Rethinking The Current Inflation Target Range In South Africa," Journal of Developing Areas, Tennessee State University, College of Business, vol. 53(2), pages 13-27, April-Jun.
    5. Irfan Ahmad Shah & Manmohan Lal Agarwal & Srikanta Kundu, 2019. "Welfare Cost of Inflation: Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(4), pages 781-799, December.
    6. Steven F. Koch & Adel Bosch, 2009. "Inflation and the Household: Towards a Measurement of the Welfare Costs of Inflation," Working Papers 200917, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Cointegration; Money Demand; Welfare Cost of Inflation;
    All these keywords.

    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

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