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Suppressed Inflation and Money Demand in Zimbabwe

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  • Sònia Muñoz
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    Abstract

    The paper investigates the divergence between inflation and monetary expansion in Zimbabwe since late 2003. The substantial decline in velocity and increasing levels of real money balances during 2004 are at odds with a record of inflation closely tracking the growth rates of monetary aggregates in the past. Possible explanations for the divergence include an unstable demand for money, a sudden shift in the underlying demand for real balances due to a sharp change in an explanatory variable, and a structural break or aberration in a normally stable money demand relation reflecting some unexplained factor such as repressed inflation (given administered prices) or measurement errors in the consumer price index. The results of the study point to the last possibility as the most likely explanation.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/15.

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    Length: 20
    Date of creation: 01 Jan 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/15

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    Related research

    Keywords: Price controls; Economic models; inflation; money demand; money balances; real money; demand for money; money growth; monetary fund; monetary expansion; monetary policy; aggregate demand; money supply; monetary aggregates; foreign exchange; real output; monetary phenomenon; rate of inflation; price level; real interest rates; inflationary pressures; moderate inflation; acceleration in inflation; gdp deflator; central bank; monetary integration; actual rate of inflation; nominal interest rate; high inflation; monetary growth; inflationary expectations; black market; inflation rates;

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    1. Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
    2. Jenkins, Carolyn, 1999. "Money Demand and Stabilisation in Zimbabwe," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(3), pages 386-421, October.
    3. Jeroen J. M. Kremers & Timothy D. Lane, 1990. "Economic and Monetary Integration and the Aggregate Demand for Money in the EMS," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 777-805, December.
    4. Weitzman, Martin L, 1991. "Price Distortion and Shortage Deformation, or What Happened to the Soap?," American Economic Review, American Economic Association, vol. 81(3), pages 401-14, June.
    5. Bennett, John, 1991. "Repressed inflation, queuing and the resale of goods in a centrally planned economy," European Economic Review, Elsevier, vol. 35(1), pages 49-60, January.
    6. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, vol. 72(3), pages 320-33, June.
    7. Claus Brand & Dieter Gerdesmeier & Barbara Roffia, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 03, European Central Bank.
    8. Arto Kovanen, 2004. "Zimbabwe," IMF Working Papers 04/130, International Monetary Fund.
    9. McNown, Robert & Wallace, Myles S., 1992. "Cointegration tests of a long-run relation between money demand and the effective exchange rate," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 107-114, February.
    10. Barro, Robert J & Grossman, Herschel I, 1974. "Suppressed Inflation and the Supply Multiplier," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 87-104, January.
    11. Muellbauer, John & Portes, Richard, 1978. "Macroeconomic Models with Quantity Rationing," Economic Journal, Royal Economic Society, vol. 88(352), pages 788-821, December.
    12. Portes, Richard & Winter, David, 1978. "The Demand for Money and for Consumption Goods in Centrally Planned Economies," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 8-18, February.
    13. Feltenstein, Andrew & Ha, Jiming, 1991. "Measurement of repressed inflation in China : The lack of coordination between monetary policy and price controls," Journal of Development Economics, Elsevier, vol. 36(2), pages 279-294, October.
    14. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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