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Prepared by Sònia Muñoz (AFR).
All growth rates in the paper are twelve-month changes.
Policy interest rates were raised sharply in the first quarter of 2004 (reaching a peak at 5,242 percent in annualized basis in March 2004) and subsequently lowered as inflation declined, but real interest rates were nonetheless maintained at very high levels throughout the year. However, with high real interest rates and an increasingly overvalued official exchange rate putting pressure on domestic producers and exporters, the Reserve Bank of Zimbabwe (RBZ) continued to operate its subsidized credit facility, which provided low-interest loans to selected borrowers.
Estimates for velocity are derived as an implied index from the path of money, prices, and real output following the standard Fisher equation
Stabilization is defined as being achieved in the first month when 12-month inflation falls below 40 percent.
In the long-run, the expected and actual values of the variables determining money demand will coincide, and Equation (1.1) can therefore be rewritten in terms of the actual rate of inflation, Δp, and the actual rate of depreciation, Δe.
Monthly GDP data was generated by using the cubic spline interpolation method.
Kovanen (2004) estimated extensive specifications of long-run money demand for Zimbabwe from 1980 to 2001 using the official exchange rate, inflation, financial innovations, real GDP and different monetary aggregates (currency, narrow money and M2). He concluded that a stable relationship could be found during 1980-1995 for currency demand, but was unable to find a stable relationship for the latter period or other monetary aggregates.
Given the short time period considered, the results of any formal unit root test should be considered highly tentative.
Following Kremers and Lane (1990), a (9-month) lag in inflation and the exchange rate was used as independent variables in the estimation.
The low income elasticity might reflect the use of a cubic spline interpolation method, which does not capture seasonal variation that could be important in Zimbabwe. Kovanen (2004) used a monthly manufacturing index and Jenkins (1999) used agricultural output to proxy the seasonal pattern, however, none of these series are available for recent years. Moreover, it is not clear how meaningful the real GDP data is given the large parallel market activity in the country.
There is no time series available on a market-based rate of return on an alternative asset to money.