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

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.