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Suppressed Inflation and Money Demand in Zimbabwe

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  • Sònia Muñoz

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.

Suggested Citation

  • Sònia Muñoz, 2006. "Suppressed Inflation and Money Demand in Zimbabwe," IMF Working Papers 06/15, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/15
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    13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    14. 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.
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    More about this item

    Keywords

    Demand for money; Administered prices; Economic models; Price controls; Money demand; Inflation; Zimbabwe; and Repressed Regime; money balances; real money; Repressed Regime;

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