On the tracks of Zimbabwe’s Hyperinflation: A Quantitative Investigation

Topal, yavuz Han (2013): On the tracks of Zimbabwe’s Hyperinflation: A Quantitative Investigation.

Abstract

This paper primarily investigates and examines the relationship between money supply growth and inflation in Zimbabwe. The theoretical analysis is based on a modified form of the “Quantity Theory of Money” (QTM) - a theory developed in the classical equilibrium framework- illustrating the relationship between the money supply, velocity of money, the interest rate and the price level in the Zimbabwean economy using monthly data from 1995:1 to 2006:12. Understanding the causes and especially the effects of inflation can provide us with policy tools to attain price stability and economic growth. The analysis rests on an error correction version of the Autoregressive Distributed Lag (ARDL) model that determines the short and the long-run trend in Zimbabwe’s inflation. The results show clearly that the main determinants of inflation in Zimbabwe are parallel market premium movements and especially the change in money supply growth. The lagged change in the 3-month-deposit rate, however, seems to have a positive effect on inflation in Zimbabwean. This anomaly could be explained by the manipulation of the Treasury bill market by the Zimbabwe government. Moreover, a Granger causality test indicates the direction of causality from money supply and parallel premium to inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Hyperinflation, Zimbabwe, inflation, parallel premium, Quantity Theory of Money, Quasi-Fiscal-Activities
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E19 - Other; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Asilis, C. M & Honohan, Patrick & McNelis, Paul D, (1993). "Money Demand during Hyperinflation and Stabilization: Bolivia, 1980-88," Economic Inquiry, Oxford University Press, vol. 31(2), pages 262-73, April.

Baumol, W.J., (1952), “The Transactions Demand for Cash: An Inventory Theoretic Approach”, Quarterly Journal of Economics, November, vol. 66, pp.545-556.

BBC (2007d) "Zimbabwe inflation ’incalculable’", available at: http: //news.bbc.co.uk/1/hi/7115651.stm, accessed on 4.7. 2011

BBC (2009) "Zimbabwe abandons its currency", available at: http: //news.bbc.co.uk/1/hi/7859033.stm, accessed on 24.7. 2011

BBC (2007c) "Zimbabwe inflation hits new high", available at: http: //news.bbc.co.uk/1/hi/6959164.stm, accessed on 04.04.2011

Brian S. (2005), ”Modern Macroeconomics: It's Origins, Development and Current State”, Edward Elgar Publishing Ltd;

Cagan, P. (1956), "Studies in the Quantity Theory of Money", The University of Chicago Press, chapter: "The Monetary Dynamics of Hyperinflation", p. 25.

Casella, A. (1989), "Testing for Rational Bubbles with Exogenous and Endogenous Fundamentals: The German Hyperinflation Once More“, Journal of Monetary Economics 24: 109-22.

Christev A. 2005, "The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s," CERT Discussion Papers 0507, Centre for Economic Reform and Transformation, Heriot Watt University.

Christiano, L. J, (1987), "Cagan's Model of Hyperinflation under Rational Expectations" International Economic Review 28: 33-49.

Darat, A. F. (1985), "Monetary Expansion of Inflation: The Experience of Three Major OPEC Economies", Journal of Economics and Business, Vol. 37, 209-221.

Degefa, D. (2001), “The parallel foreign exchange market and macroeconomic performance in Ethiopia”, African Economic Research Consortium (AERC) Research Paper No 107, Nairobi, Kenya.

Diba, B., and Grossman H, "Rational Inflationary Bubbles" Journal of Monetary Economics 21 (1988): 35-46.

Dlamini, A., A. Dlamini and T. Nxumalo (2001), "A Cointegration Analysis of the Determinants of Inflation in Swaziland", available at: http://www.centralbank.org.sz/docs/Inflation_Paper.pdf

Engsted, T. (1996),"The Monetary Model of the Exchange Rate under Hyperinflation: New Encouraging Evidence." Economics Letters 51: 37-44.

Engsted, T. (1993), "Cointegration and Cagan's Model of Hyperinflation under Rational Expectations." Journal of Money, Credit, and Banking 25:350-60.

Engsted, T. (1994), "The Classic European Hyperinflations Revisited: Testing the CaganModel Using a Cointegrated VAR Approach." Economica 61:331-41.

Flood, P., and Garber, P. (1980), "Market Fundamentals versus Price- Level Bubbles: The First Test." Journal of Political Economy 88: 745-70

Flood, P., Garber. P and Scott, L. (1984), "Multi-Country Tests for Price-Level Bubbles." Journal of Economic Dynamics and Control 8: 329-40.

Frenkel, J., and Taylor.P, (1993). "Money Demand and Inflation in Yugoslavia, 1980-1989." Journal of Macroeconomics 15, 455-81.

Friedman, M. (1970),”The Counter-Revolution in Monetary Theory”, Wincott Memorial Lecture, London, September 16.

Goodfriend, Marvin S. (1982), "An alternate method of estimating the Cagan money demand function in hyperinflation under rational expectations," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 43-57

Gray, J. (1984), "Dynamic Instability in Rational Expectations Models: An Attempt to Clarify," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 93-122, February

Hanke, S. (2008), "Measurements of Zimbabwe's Hyperinflation", The Cato Journal, available at: http://www.cato.org, accessed on 27.7. 2011

Keynes, J.M. (1936), “The General Theory Of Employment, Interest, And Money”, CreateSpace Independent Publishing Platform,

Kingston, G. H. (1982), "The Semi-Log Portfolio Balance Schedule is Tenuous“ Journal of Monetary Economics, 9, pp. 389-399

Kovanen, A. (2004), “Zimbabwe: A quest for a nominal anchor”, Working Paper WP/04/130, International Monetary Fund. Makochekanwa, A. (2007), "A Dynamic Enquiry into the Causes of Hyperinflation in Zimbabwe", Working Paper 200710, University of Pretoria, Department of Economics.

Michael, P., A. R. Nobay, and D. A. Peel, (1994), "The German Hyperinflation and the Demand for Money Revisited." International Economic Review 351-22.

Muñoz, S. (2006), "Suppressed Inflation and Money Demand in Zimbabwe", Working Paper No. 06/15.

Obstfeld, Maurice, and Rogoff K, (1983), "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?" Journal of Political Economy91, 675-87.

Pesaran, M. H. & Shin, Y. & Smith, R. J., (1996), "Testing for the existence of a long run relationship", DAE Working papers, No.9622.

Pesaran, M. H., Shin, Y. and Smith, R. J. (2001), "Bounds Testing Approaches to the Analysis of Level Relationships", Journal of Applied Econometrics, Vol. 16, 289-326.

Petrovic, Parle, and Vujocevic (1995), "Demand for Money and Exchange Rate Determination in Hyper-Inflation: Conceptual Issues and Evidence." Working paper, University of Belgrade,

Phylakfis, Kate, and Taylor, P, (1992), "The Monetary Dynamics of Sustained High Inflation." Southern Economic Journal 58: 610-22. Phylaktis K, Taylor, M. (1993), “Money Demand, The Cagan Model and the Inflation Tax: The Latin American Evidence”, Review of Economics and Statistics, 75(February), p.32-37;

Salemi, M. K.; Sargent, T (1979), "The Demand for Money during Hyperinflation under Rational Expectations: II“. International Economic Review (Blackwell Publishing) 20 (3): 741–758

Sargent, T. (1977), "The Demand for Money during Hyperinflation under Rational Expectations: I". International Economic Review (Blackwell Publishing) 18 (1): 59–82.

Sargent, T. (1982), “The Ends of Four Big Hyperinflations,” in Inflation: Causes and Consequences, Robert E. Hall, ed. Chicago: U. Chicago Press, pp. 41–97.

Sargent, T.; Neil W. (1973). "Rational Expectations and the Dynamics of Hyperinflation“, International Economic Review (Blackwell Publishing) 14 (2): 328–350.

Taylor, P. (1991). "The Hyperinflation Model of Money Demand Revisited„ Journal of Money, Credit, and Banking 23, 327-51.

Tobin, J., (1956), “The Interest Elasticity of the Transactions Demand for Cash”, Review of Economics and Statistics, August, vol. 38, no. 3, pp.241-247. 22