In this study, we address ‘stylised facts’ of price setting for Zimbabwe and compare them to similar countries where price based studies have been done, Lesotho and Sierra Leone. Firstly, we investigate whether prices become more flexible or rigid in Zimbabwe after the introduction of the multi-currency system and compare it to Lesotho and Sierra Leone. Secondly, we investigate the magnitude of price changes and explore the adjustment process as Zimbabwe moved further away from the day the new currency system was introduced. We also examine the dynamic features of price changes in a new currency system since they may have implications on business cycles and transmission into monetary policy.
Methodology and Results
The study uses weekly product level data collected at the retail outlet level over the period January 2012 and February 2015. Our results show that prices are stickier in Zimbabwe than other similar countries, with retailers on average changing their prices every 3.9 months compared to Lesotho (2.7 months) and Sierra Leone (2.0 months). There is a non-linear time-trend in the frequency of price changes – the frequency of price changes initially increases but then fall after 23 months (October 2013) suggesting that prices became more flexible as Zimbabwe moved further away from the date the new currency was introduced. As in many other countries, a larger proportion of products do not change prices between months, however, for those that do change the magnitude of the change is relatively large. There is evidence that variance in inflation is strongly correlated with the size of price changes rather than the frequency of price changes implying that pricing in Zimbabwe follows staggered contracts as in time dependent pricing models.
The results in this paper suggests that the adoption of a new currency system restored price signals which were lost during the hyperinflation period. However, even though inflation fell drastically after the new currency system, there was higher price stickiness for lower priced commodities, which maybe because of the coarseness of the new currency denominations. Since many countries may opt to move to stable and convertible currency whenever they face a macroeconomic crisis, the results in this paper provide information on the effects of a new currency system particularly on price setting behaviour of firms at a disaggregated level. The analysis can also be used to illustrate medium to long term effects of adopting a new currency system on inflation dynamics and price adjustment mechanisms.