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Measuring the Welfare Cost of Inflation in South Africa

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Josine Uwilingiye

    ()

    (Department of Economics, University of Pretoria)

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.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200804.

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Length: 10 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:pre:wpaper:200804
Contact details of provider: Postal: PRETORIA, 0002
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Web page: http://www.up.ac.za/economics

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