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Hyperinflation in Zimbabwe

Money Demand, Seigniorage and Aid shocks
Tara McIndoe, Trinity College Dublin

Abstract

Zimbabwe has recently experienced record hyperinflation of 80 billion percent a month. This paper uses new data from Zimbabwe to investigate money demand under hyperinflation using an ARDL estimation for the period 1980-2008. The results produce plausible convergence rates and long- run elasticities, indicating that real money balances are cointegrated with the inflation rate. Evidence is also presented that suggests prices are being driven by increases in the money supply rather than by changes in price setting behaviour. The paper additionally uses the estimated elasticity on the inflation variable to calculate the maximum level of seigniorage revenue that could be raised in the economy. Actual seigniorage levels increased dramatically after 2000, with inflation eventually exceeding the rate required to maximize this revenue stream. This is discussed in relation to international financing constraints and the collapse of the domestic tax base.

J.E.L classi cation: E31, E41, E42, E58, E62, E63, E65, O24

Keywords: Hyperinflation, Cointegration, Money Demand, Parallel market exchange rate, Zimbabwe


Last updated 28 August 2014 by IIIS (Email).