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Public Debt and Inflation Dynamics: Empirical Evidence from Zimbabwe

Author

Listed:
  • Talknice Saungweme
  • Nicholas M. Odhiambo

Abstract

The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.

Suggested Citation

  • Talknice Saungweme & Nicholas M. Odhiambo, 2021. "Public Debt and Inflation Dynamics: Empirical Evidence from Zimbabwe," Working Papers 2107, African Economic and Social Research Institute (AESRI).
    • Handle: RePEc:afa:wpaper:2107
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    File URL: https://aesri.org/RePEc/afa/afa-wpaper/AESRIWP07.pdf
    File Function: Revised version, 2022
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    More about this item

    Keywords

    ARDL; inflation; public debt; Zimbabwe;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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