Measuring the Welfare Cost of Inflation in South Africa
Rangan Gupta () and
No 200804, Working Papers from University of Pretoria, Department of Economics
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.
Keywords: Cointegration; Money Demand; Welfare Cost of Inflation (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 (search for similar items in EconPapers)
Pages: 10 pages
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Journal Article: MEASURING THE WELFARE COST OF INFLATION IN SOUTH AFRICA (2008)
Working Paper: Measuring the welfare cost of inflation in South Africa (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:200804
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