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Hyperinflation in Zimbabwe: Money Demand, Seigniorage and Aid shocks

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  • Tara McIndoe

    (Trinity College Dublin)

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    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 nancing constraints and the collapse of the domestic tax base.

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    Bibliographic Info

    Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp293.

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    Date of creation: Jul 2009
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    Handle: RePEc:iis:dispap:iiisdp293

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    1. R Mabugu, 2001. "Macroeconomic Effects Of A Devaluation In Zimbabwe A Cge Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 69(4), pages 708-733, December.
    2. Khan, Mohsin S, 1980. "Dynamic Stability in the Cagan Model of Hyperinflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 577-82, October.
    3. Mohsen Bahmani-Oskooee & Hafez Rehman, 2005. "Stability of the money demand function in Asian developing countries," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 773-792.
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