Measuring the Welfare Cost of Inflation in Zimbabwe

Makochekanwa, Albert (2008): Measuring the Welfare Cost of Inflation in Zimbabwe.

Abstract

The study estimates the long-run equilibrium relationship between money balance as a ratio of income and treasury bill rate for the Zimbabwean economy. These estimates are done for two periods, the entire period (using quarterly data) of 1980:01 to 2005:04 and the hyperinflationary period (using monthly data) of 1999:01 to 2005:12. These estimates are in turn used to obtain estimates for the welfare cost of inflation. Using the Johansen technique, the research estimates a log-log specification and a semi-log model of the above relationship for the two periods. Estimates suggest that the welfare cost of inflation for Zimbabwe ranges between 0.9% and 23.4% of GDP for a band of 10 to 300% of inflation in the case of estimations done for the entire period. Welfare cost estimates for the hyperinflationary period are 0.4% and 27.6% of GDP, respectively.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration; Interest elasticity; Money Demand; Welfare Cost of Inflation
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Bailey, M. J. 1956. The welfare cost of inflationary finance. Journal of Political Economy 64: 93–110.

Cagan, P. 1956. The Monetary Dynamics of Hyperinflation. In: Studies in the Quantity Theory of Money, Milton Friedman (ed). Chicago: University of Chicago Press.

Craig, B and G. Rocheteau. 2005. Rethinking the Welfare Cost of Inflation. Federal Reserve Bank of Cleveland

Fisher, S. 1981. Towards an Understanding of the Costs of Inflation: II. Carnegie-Rochester Conference Series on Public Policy 15: 5-41.

Friedman, M. 1969. The optimum quantity of money. In: In the Optimum Quantity of Money and Other essays. Chicago: Aldine Publishing Company.

Ireland, P.N. 2007. On welfare cost of inflation and the recent behaviour of Money Demand. Working paper, Department of Economics, Boston College.

Johansen, S. 1991. Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica 59: 1551–1580.

Johansen, S. 1995. Likelihood-based Inference in Cointegrated Vector Autoregressive Models. Oxford: Oxford University Press.

Lucas, R.E.Jr. 2000. Discussion of: Stanley Fischer, Towards an Understanding of the Costs of Inflation II. Carnegie-Rochester Conference Series on Public Policy 15: 43-52.

Lucas, R.E.Jr. 2000. Inflation and Welfare. Econometrica 68:247–74.

Makochekanwa, A. 2007. A Dynamic Enquiry into the Causes of Hyperinflation in Zimbabwe. Working Paper Series 2007 – 10.University of Pretoria, Department of Economics

Meltzer, A. H. 1963. The Demand for Money: The Evidence from the Time Series. Journal of Political Economy 71: 219-246.

Serletis, A and K. Yavari. 2004. The welfare cost of inflation in Canada and the United States. Economics Letters 84: 199–204.

Lagos, R and R, Wright. 2004. A Unified Framework for Monetary Theory and Policy Analysis. Federal Reserve Bank of Minneapolis Research Department Sta. Report 346

Uwilingiye, J and R. Gupta. 2008 (forthcoming) Measuring the Welfare Cost of Inflation in South Africa. South African Journal of Economics.