Measuring the Welfare Cost of Inflation in Zimbabwe

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