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Measuring the Welfare Cost of Inflation in South Africa

Rangan Gupta () and Josine Uwilingiye

No 200804, Working Papers from University of Pretoria, Department of Economics

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.

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
Date: 2008-03
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Journal Article: MEASURING THE WELFARE COST OF INFLATION IN SOUTH AFRICA (2008) Downloads
Working Paper: Measuring the welfare cost of inflation in South Africa (2008) Downloads
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