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.
