Abstract
History that is ignored is very vengeful. The paper tests the claim by the central bank governor, who presided over hyperinflation in 2004-2008, that inflation was mainly driven by speculation and shadow printing of money in the financial system. Mutually reinforcing corporate incest manifesting in the real estate sector, banking sector, parallel foreign exchange market and the Zimbabwe stock exchange underpinned hyperinflation dynamics before and during his term of office. Speculative activities in these sectors drove money supply growth, parallel exchange rate premium and so, inflation. Existing studies have not tested his hypothesis and summarily have dismissed it arguing that hyperinflation was a doing of the central bank’s monetary indiscipline. Using ARDL models we establish long run relationships amongst the building materials price index, consumer price index, parallel exchange rate and broad money supply. We also find bidirectional causality between money supply and the consumer price index as well as between the building materials price index and money supply. We find causation running from building materials index to consumer price index; from parallel exchange rate to consumer price index; and from broad money to parallel exchange rate. Our findings, to a considerable extent, not only confirm the governor’s argument, but also confirm existing narratives of monetary indiscipline in explaining hyperinflation. Keywords: Reserve Bank of Zimbabwe, Gideon Gono, Inflation, Building Materials Index, CPI, Parallel Exchange rate, ARDL DOI: 10.7176/JESD/11-10-14 Publication date: May 31 st 2020
Highlights
Zimbabwe has continued to fall at the stumbling block, hyperinflation
We demonstrate in the paper that to a considerable extent the governor’s claims have substance even though that does not confute the verdict that monetary indiscipline was a major www.iiste.org factor in the dynamics
LogCPIt is the natural logarithm of the consumer price index; logBMPIt is the natural log of the building materials price index; logM3t is the natural logarithm of broad money supply; and logPERt is the natural logarithm of the parallel exchange rate. t is a time index
Summary
Zimbabwe has continued to fall at the stumbling block, hyperinflation. Reasons for hyperinflation are varied and literature has suggested that monetary indiscipline is the bedrock of inflation dynamics in Zimbabwe. The moment bidirectional causality is established, QTM based explanations become problematic The former governor of the central bank, Gideon Gono, claimed that scholars had turned a blind eye to the multifaceted nature of inflation drivers in Zimbabwe during his tenure. Kararach & Otieno (2016) find evidence of sustained long run depreciation of the real parallel exchange rate between 1998 and 2008, evidence which points to an ever increasing role of imported inflation in the evolution of inflation dynamics in Zimbabwe given the importance of imports in filling the gap created by a collapse in domestic aggregate supply. Government had to find ways of sourcing foreign currency for critical operations
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