Measuring the welfare cost of inflation in south africa: a reconsideration

Rangan Gupta, Josine Uwilingiye

Abstract


In this paper, using the Fisher and Seater (1993) long-horizon approach, the writers estimate the long-run equilibrium relationship between money balance as a ratio of income and the Treasury bill rate for South Africa over the period 1965:02 to 2007:01, and, in turn, use the obtained estimates of the interest elasticity and the semi-elasticity to derive the welfare cost estimates of inflation, using both Bailey’s (1956) consumer surplus approach and Lucas’ (2000) compensating variation approach. When the results are compared to welfare cost estimates obtained recently by Gupta and Uwilingiye (2008), using the same data set, but basing it on Johansen’s (1991, 1995) cointegration technique, the values are less than half of those obtained in the latter study. These range from 0.16 percent to 0.36 percent of GDP for the target-band of three percent to six percent of inflation. The paper thus highlights the fact that welfare cost estimates of inflation are sensitive to the methodology used to estimate the long-run equilibrium money demand relationships.

Full Text:

PDF


DOI: http://dx.doi.org/10.4102/sajems.v12i2.272

Submitted: 18 August 2011
Published: 22 August 2011


African Online Scientific Information Systems (Pty) Ltd t/a AOSIS
Reg No: 2002/002017/07
RSA Tel: 086 1000 381
International Tel: +27 21 975 2602
15 Oxford Street, Durbanville, Cape Town, 7550, South Africa
publishing(AT)aosis.co.za replace (AT) with @

All articles published in this journal are licensed under the Creative Commons Attribution 4.0 International (CC BY 4.0) license, unless otherwise stated.
Website design & content: ©2016 AOSIS (Pty) Ltd. All rights reserved. No unauthorised duplication allowed.
By continuing to use this website, you agree to our Privacy Policy.

Subscribe to our newsletter

Get specific, domain-collection newsletters detailing the latest CPD courses, scholarly research and call-for-papers in your field.

Subscribe

South African Journal of Economic and Management Sciences    |    ISSN: 1015-8812 (PRINT)    |    ISSN: 2222-3436 (ONLINE)