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Inflation Dynamics in a Dollarised Economy: The Case of Zimbabwe

Author(s)
William Kavila and Pierre Le Roux
Publication date
May 2016

This paper explores the dynamics of inflation in the dollarised Zimbabwean economy using the Autoregressive Distributed Lag Model (ARDL) with monthly data from 2009:1 to 2012:12. The main determinants of inflation were found to be the US dollar/South African rand exchange rate, international oil prices, inflation expectations and South African inflation rate. During the local currency era, inflation dynamics in Zimbabwe were explained by excess growth in money supply, changes in import and administered prices, unit labour costs and output (Chhibber, Cottani, Firuzabadi and Walton, 1989). According to Makochekanwa (2007), hyperinflation during the same era was attributed to excess money supply growth, lagged inflation and political factors. Coorey, Clausen, Funke, Munoz and Ould-Abdallah (2007) affirmed these findings by identifying excess money supply growth as a source of high inflation in Zimbabwe during the local currency era. In essence, the findings of this study point to a shift in inflation dynamics in Zimbabwe. This shift in inflation dynamics means that policies, which were used to respond to both internal and external shocks that have an impact on price formation, might not be applicable in a dollarised economy.

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Series title
Working paper 606
JEL classifications