Thursday, July 31, 2008

Cause Of Hyperinflation In Zimbabwe

It would be interesting to see if the switch to hyperinflation in 2003 was the result of multilteral financial restrictions placed on the government of Zimbabwe by ZDERA in late 2001/early 2002.

Suppressed Inflation and Money Demand in Zimbabwe

Sònia Muñoz
University of London - School of Economics; International Monetary Fund (IMF)
January 2006
IMF Working Paper No. 06/15

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.


Another interesting article, basically states that hyperinflation is the result of a 1) growth in the money supply ('printinig money') as a response to 2) fiscal and quasi-fiscal deficts. They don't make to point 3, which would be what the origin of these fiscal and quasi-fiscal deficits is. The article also doesn't mention financial sanctions against Zimbabwe, which I think is suspect, when we're discussing inflation and hyperinflation.

Zimbabwe’s Hyperinflation Money Demand Model
Albert Makochekanwa
University of Pretoria
Working Paper: 2007-12
July 2007


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posted by MrK @ 7:37 PM

1 Comments:

At 5:07 AM , Blogger Jim B. said...

I am definitely not an expert on this, but I would say that two of the main factors that produced these fiscal & quasi-fiscal deficits were the fallout from the land reform program (which killed productivity), and Mugabe's insistence on involving Zimbabwe in the Second Congo War. Both of these factors produced severe strain on the Zimbabwean economy, and of course, when there's no productivity to speak of, most governments crank up the printing presses to make up the difference.

--Jim @ Buy Zimbabwe Dollars

 

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