Hyperinflation in Zimbabwe: Money Demand, Seigniorage and Aid Shocks

48 Pages Posted: 18 May 2010

See all articles by Tara McIndoe Calder

Tara McIndoe Calder

Central Bank of Ireland; University of Dublin - Institute for International Integration Studies

Date Written: May 1, 2009

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 financing constraints and the collapse of the domestic tax base.

Keywords: Hyperinflation, Cointegration, Money Demand, Parallel Market Exchange Rate, Zimbabwe

JEL Classification: E31, E41, E42, E58, E62, E63, E65, O24

Suggested Citation

McIndoe Calder, Tara, Hyperinflation in Zimbabwe: Money Demand, Seigniorage and Aid Shocks (May 1, 2009). Institute for International Integration Studies (IIIS) Discussion Paper No. 293, Available at SSRN: https://ssrn.com/abstract=1610298 or http://dx.doi.org/10.2139/ssrn.1610298

Tara McIndoe Calder (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

University of Dublin - Institute for International Integration Studies ( email )

The Sutherland Centre Level 6 Arts Building
Trinity College
Dublin 2
Ireland

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