Original Research

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

Rangan Gupta, Josine Uwilingiye
South African Journal of Economic and Management Sciences | Vol 12, No 2 | a272 | DOI: https://doi.org/10.4102/sajems.v12i2.272 | © 2011 Rangan Gupta, Josine Uwilingiye | This work is licensed under CC Attribution 4.0
Submitted: 18 August 2011 | Published: 22 August 2011

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Rangan Gupta, University of Pretoria, South Africa
Josine Uwilingiye, University of Johannesburg, South Africa

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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.

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