Towards more effective monetary policy in the absence of a local currency: An econometric analysis of the efficacy of the Reserve Bank of Zimbabwe’s Monetary Policy from 2009 to 2017

Abstract

While there is a large body of research on monetary policy effectiveness in the conventional setting of countries with local currencies, the existence and potential growth of countries operating without local currencies necessitates the evaluation of monetary policy when countries do not have a local currency. To this end this paper uses event studies using the daily stock prices of the most liquid shares on the Zimbabwean Stock Exchange to evaluate the effectiveness of monetary policy in Zimbabwe in the absence of a local currency from 2009 to 2017. These event studies were based on the foundational work of Brown and Warner (1985) after adjusting for the criticisms of Coutts et al. (1994) and the revisions to the method as documented by De Jong (2007). These studies separated instances where monetary policy had 1 an impact on the stock market in Zimbabwe and cases when it did not. Following this separation, the paper then identified the commonalities in policy pronouncements that were impactful and those that were not. It could be seen from the results that monetary policy pronouncements were not always effective. However, despite this, monetary policy was still effective when it included directives that directly impacted bank operations. In this way, monetary policy effectiveness in the absence of a local currency required manipulation of bank operating regulations or the promise of legislative changes or impending legislative changes. In the absence of these, monetary policy changes by the central bank did not significantly influence stock market behaviour and potentially carried little impact on the economy as a whole.