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

Steven Fredric Koch () and Adel Bosch ()
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Adel Bosch: South African Reserve Bank, Pretoria, South Africa

No 200917, Working Papers from University of Pretoria, Department of Economics

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.

Keywords: Almost ideal demand system; Compensating variation; Nonparametric density (search for similar items in EconPapers)
JEL-codes: D11 D12 C14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2009-08

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Persistent link: http://EconPapers.repec.org/RePEc:pre:wpaper:200917

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