Time aggregation, long-run money demand and the welfare cost of inflation

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Authors

Uwilingiye, Josine

Journal Title

Journal ISSN

Volume Title

Publisher

University of Pretoria, Department of Economics

Abstract

Two recent studies have found markedly different measures of the welfare cost of inflation in South Africa, obtained through the estimation of long-run money demand relationships using cointegration and long-horizon approaches. Realizing that the monetary aggregate and the interest rate variables are available at higher frequencies than the measure of income and that long-run properties of data are unaffected under alternative methods of time aggregation, we test for the robustness of the two estimation procedures under temporal aggregation and systematic sampling. Our results indicate that the long-horizon method is more robust to alternative methods of time aggregation, and, given this the welfare cost of inflation in South Africa for an inflation target band of 3 percent to 6 percent lies between 0.15 percent and 0.41 percent.

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Keywords

Cointegration, Long-horizon regression, Money demand, Time aggregation, Welfare cost of inflation

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Citation

Gupta, R & Uwilingiye, J 2008, 'Time aggregation, long-run money demand and the welfare cost of inflation', University of Pretoria, Department of Economics, Working paper series, no. 2008-25. [http://web.up.ac.za/default.asp?ipkCategoryID=736&sub=1&parentid=677&subid=729&ipklookid=3]