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Measuring the welfare cost of inflation in South Africa

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 provides quite a good approximation in terms of welfare.

Working Paper 068
1 February 2008
RELATED JOURNAL:

2008, South African Journal of Economics, 76(1), 16-25
SHARE THIS Working Paper PUBLICATION:
20 September 2012
Publication Type: Working Paper
JEL Code: E31, E41, E52

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