SciELO - Scientific Electronic Library Online

 
vol.12 número2IAS15 inflation adjustments and EVA: Empirical evidence from a highly variable inflation regime índice de autoresíndice de materiabúsqueda de artículos
Home Pagelista alfabética de revistas  

Servicios Personalizados

Articulo

Indicadores

Links relacionados

  • En proceso de indezaciónCitado por Google
  • En proceso de indezaciónSimilares en Google

Compartir


South African Journal of Economic and Management Sciences

versión On-line ISSN 2222-3436
versión impresa ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.12 no.2 Pretoria jul. 2009

 

ARTICLES

 

Measuring the welfare cost of inflation in South Africa: A reconsideration

 

 

Rangan Gupta; Josine Uwilingiye

Department of Economics, University of Pretoria

 

 


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's (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.

Keywords: Long-horizon regression; money demand; welfare cost of inflation

JEL E31; 41; 52


 

 

“Full text available only in PDF format”

 

 

References

BAILEY, M.J., 1956. The welfare cost of inflationary finance. Journal of Political Economy, 64: 93-110.         [ Links ]

BROCK, W., 1974. Money and growth: the case of long-run perfect foresight. International Economic Review, 15: 750-777.         [ Links ]

CAGAN, P., 1956. The monetary dynamics of hyperinflation. In Milton Friedman, (ed). Studies in the quantity theory of money. Chicago: University of Chicago Press.         [ Links ]

DOTSEY, M. & IRELAND, P.N., 1996. The welfare cost of inflation in general equilibrium. Journal of Monetary Economics, 37: 29-47.         [ Links ]

ENGLE, R.F. & GRANGER, C.W., 1987. Cointegration and error correction: representation, estimating and testing. Econometrica, 55: 251-276.         [ Links ]

FELDSTEIN, M., 1997. The costs and benefits of going from Llw inflation to price stability. In Romer, C.D. and Romer, D.H. (eds). Reducing inflation: motivation and strategy. Chicago: University of Chicago Press.         [ Links ]

FISCHER, S., 1981. Towards an understanding of the costs of inflation: II. Carnegie-Rochester Conference Series on Public Policy, 15: 5-41.         [ Links ]

FISHER, M. & SEATER, J., 1993. Long-run neutrality and superneutrality in an ARIMA framework. American Economic Review, 83:402-415.         [ Links ]

FRIEDMAN, M., 1969. The optimum quantity of money. In The optimum quantity of money and other essays, Chicago: Aldine Publishing Company.         [ Links ]

GOLDFELD, S.M., 1976. The case of missing money. Brookings Papers on Economic Activity, 7: 683-740.         [ Links ]

GUPTA, R. & UWILINGIYE, J., 2008. Measuring welfare cost of inflation in South Africa. South African Journal of Economics, 76:16-25.         [ Links ]

IRELAND, P.N., 2008. On welfare cost of inflation and the recent behaviour of money demand. NBER Working Paper, No. WP14098.         [ Links ]

JOHANSEN, S., 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models, Econometrica, 59:1551-1580.         [ Links ]

JOHANSEN, S., 1995. Likelihood-based inference in cointegrated vector autoregressive models, Oxford: Oxford University Press.         [ Links ]

LUCAS, R.E. Jr, 1981. Discussion of: Stanley Fischer, towards an understanding of the costs of inflation II. Carnegie-Rochester Conference Series on Public Policy, 15:43-52.         [ Links ]

LUCAS, R.E. Jr, 2000. Inflation and welfare. Econometrica, 68:247-274.         [ Links ]

MELTZER, A.H., 1963. The demand for money: the evidence from the Time series, Journal of Political Economy, 71:219-246.         [ Links ]

PHILLIPS, P.C.B. & SOULIARIS, S., 1990. Asymptotic properties of residual based tests for cointegration. Econometrica, 58:165-193.         [ Links ]

SERLETIS, A. & YAVARI, K., 2004. The welfare cost of inflation in Canada and the United States. Economics Letters, 84: 199-204.         [ Links ]

SERLETIS, A. & YAVARI, K., 2005. The welfare cost of inflation in Italy. AApplied Economics Letters, 12: 165-168.         [ Links ]

SERLETIS, A. & VIRK, J.J., 2006. Monetary aggregation, inflation and welfare. Applied Financial Economics, 16: 499-512.         [ Links ]

SERLETIS, A. & YAVARI, K., 2007. On the welfare cost of inflation in Europe. Applied Economics Letters, 14: 111-113.         [ Links ]

SIDRAUSKI, M., 1967. Rational choice and patterns of growth in a monetary economy. American Economic Review, 57: 534-544.         [ Links ]

Creative Commons License Todo el contenido de esta revista, excepto dónde está identificado, está bajo una Licencia Creative Commons