Foreign Investment under Inflationary Pressure: Macroeconomic Fragility in Zimbabwe

This research paper looks at the different economic factors that affect foreign investments in Zimbabwe, specifically the interaction between foreign investment and inflation changes. It delves into how central bank policy, in the face of erratic inflation, can affect the duration and the change of investment patterns in a macroeconomic environment full of uncertainties. The model presented in this paper embodies the interaction among inflation thresholds, money supply reactions, and capital inflows, thus depicting the scenarios of macroeconomic fragility due to late policy adjustments to structural shocks. The empirical analysis reveals an optimal inflation threshold of A*=3.02, beyond which real investment begins to decouple from monetary policy, and a neutral policy coefficient of a*=0.0000, indicating the complete erosion of policy traction under hyperinflation. These results suggest that Zimbabwe’s monetary authorities faced a regime in which stabilization efforts were rendered ineffective, emphasizing the importance of credibility restoration for regaining investment responsiveness. The findings pinpoint the issues of achieving a perfect equilibrium between inflation control and investment stimulation in a market environment with price instability.