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Thedynamicsofhyperinflationandstabilizationpolicies
Therunningofthecountrycanbeviewedcommerciallyasabusinessenterprisebythe
economists.Thebusinessneedstoberuninequilibriumabalancebetweensupplyanddemand
mustbestrickeniftheentrepreneurortheowneroftheenterpriseistoenjoyanybenefits
accruedbyrunningabusiness.Inthecaseofacountry,itshouldbegovernedinawaythatthat
thepricesofgoodsandservicesarekeptincontrol.Thestakeholdersmustnotlettheprices
escalatebeyondtheabilityofatypicalcitizen.Similarly,thereleaseofcashintotheeconomy
shouldbemaintainedsothattheflowofmoneyismonitoredandcontrolled,hencepreserving
thevalueofthatparticularcurrency.
Rationale
Thisproposalwilldigintoinflationandfindouthowinflationhasaffectedeconomiesof
acountry,inparticularZimbabweandthewaystostabilizethiscondition.Thedynamicsof
hyperinflationwillalsobelookedintoindetailtobringouttherealpictureandthedamagesit

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causestoaneconomy.TheproposalwillalsofocusonthecausesofinflationinZimbabweand
thehowthetheoriesofhyperinflationhaveappliedinthiscontext.Theproposalwillalsolookat
thequantitytheoryofmoneyandhowitisassociatedwithhyperinflation.
Introduction
Hyperinflationcanbedefinedasasituationwherethepricesofgoodsandservices
escalatebeyondcontrolthattheconceptofinflationisanunderstatement.Economically,
hyperinflationcanbedefinedtooccurwhenthetotalinflationoveraperiodofthreeyearsis
equivalentorexceeds100%.Countriesinhyperinflationusuallyexperiencerapiderosionofreal
valueoflocalcurrencypromptingthepopulationtoholdarelativelystableforeigncurrency.
Hyperinflationmakesthepricesofgoodsandservicesinaneconomytoriserapidly
sincethevalueofthelocalcurrencylosestherealvaluequickly.Zimbabwehasexperienced
hyperinflationsince2001withinflationratesoverawhopping100%.However,asfrom2006,
inflationinZimbabwehasrisentoanuncontrollable1500%annually.Itshouldbeobservedthat
Zimbabwewastheonlycountrythatwasexperiencinghyperinflationandthefirstinthe21st
centurytohavehyperinflation.InflationinZimbabwehasbeenperceivedintwoways.First,the
privatesectorspeculationwhichtheZimbabweanauthoritiesarguethattheprivatesectorrises
upthepricesintentionallytomaximizeprofitsontopilepressureontheeconomythrough
ruthlesspriceincrements.

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Secondly,theauthoritiesalsobelievethatthewithdrawalofaidsandtheinternational
economicsanctionshaveledtoeconomicdeclinefromtheyear2000.Thisperceptionhasthe
explanationthattheprintingandmintingofexcessmoneybythegovernmentisusuallytailored
tobridgethegapbetweenthegovernmentrevenueandtheactualreceipts.Thisproposalwith
examinetheseconceptsindepth.

Literaturereview
Inthissection,theCagan(1956)hyperinflationmodelwillbeexamined,wherehe
assessedthestatisticalconnectionbetweencashandchangesinpricebyconductinginstancesof
hyperinflationinsixdifferentcountriesacrossEurope.AccordingtoCagan,thedemandfor
monetarybalancesdeclinedwithincreaseininflation,assuminginflationplayedasignificant
roleindetermininghyperinflation.
MiltonFriedmanbaseshisviewofhyperinflationinquantitytheoryofmoney.This
theorystatesthattherelationshipbetweenmoneyandthepricelevelisdirectlyproportional.
Thisrelationshipimpliesthatinflationwillincreasewithanincreaseinmoneysupplyandthe
continuedtrendwillleadtohyperinflation.InZimbabwe,thesupplyofmoneyandthepricesof
goodsandservicesincreasedintandem,asperthequantitytheoryofmoneybecausepeople
optedtousetheavailablecashimmediately,ratherthantowaitonthedepreciatingcash.Thisin

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turnledtotheincreaseofvelocityaswellasincreaseofmoneythroughprintingofnew
currency,henceexponentialincreaseinpricesofgoodsandservicesinZimbabwe.
Methodology
Thisproposalwillseektoclarifythemechanismsthroughwhichmoney,thesettingof
pricebehaviorandtherequirementsofgovernmentrevenuecollaborateinZimbabwe,to
examinetheexplanationsputforthbytheauthoritiesaboutthehyperinflationinZimbabwe.To
achievethisgoal,theproposalwilllookatvariousmodelsandteststhatwillleadtothe
understandingofthehyperinflation.

Grangercausalitytest
Ingeneral,itisobviousthatmoneyengenderstherateofinflation,butthereversecould
alsobeclaimedtobetrue.Itcanbesaidthathyperinflationhasselfperpetuatingtendencies,due
tothefactthattheriseinpricesofgoodsandservicesresultstotheriseindemandfornominal
cash.Thus,causationdevelopsfrominflationtosupplyofmoney.Thistestinvestigatesthe
amountoftheexistingvalueofmoneyandpremiumisautilizablecomponentintheprediction
ofinflation.
Theoreticalmodel

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Thismodelprovidestheclassicalquantitytheoryofmoneywhichbelievesthat
institutionalfactorsdeterminetherateofmoneycirculation.Theeconomyisassumedtobeor
closetotherealGDP.Inthiscase,thegrowthofmoneydoesnothaveaneffectintherealGDP.
Thisimpliesthat,holdingbothvariablesconstant,thegrowthrateofmoneyisdirectly
proportionaltotherateofinflation.Inflationreducesmoneydemandduetoanincreasein
opportunitycostofholdingmoney.HyperinflationinZimbabweincreasedtheparallelmarket
premiumandconsequently,achangeintheparallelmarketpremiumaffectedthevelocityof
cashinthecirculation.Thedatausedherewasderivedfromvarioussourcesincludingthe
websiteoftheRBZ.
TheinflationdataandmoneysupplywascollectedfromRBZwhileparallelexchange
ratewascollectedfromCarmenM.Reinhart,aHarvardKennedySchoolProfessorofthe
InternationalFinancialSystem.ThemethodologyinthispaperemploysheavilytheARDL
cointegrationapproachforinvestigatingtherelationshipbetweentheinflationandits
determinants.ARDLwasusedbecauseithasseveraladvantagesoverothermodelsof
cointegration.ARDLcanbeusedwithtimeseriesdata,canalsobeemployedina
generaltospecificmodelingbyincludinginsufficientnumberstolagsforthedatagenerating
anderrorcorrectionmodel(ECM)canbederivedusingARDLcointegrationmodel.
Theoretical/conceptualframework

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LaggedchangeintheinflationandmoneysupplygrowthareinsignificantintheARDL
framework.Moreover,theeverincreasingpricesarenotunsustainableinthelongrunhence
usingtheconceptoflongrunrelationscouldgiveincorrectresults.Zimbabwehadalmostallher
priceslistedinforeigncurrencieswhichfullywroteoffinflationinertia.Inthiscase,exchange
rateisausefultoolforcurbinginflationratestherebymakingstabilizationofhyperinflationless
costlyincomparisontomoderatemethodsofdealingwithhyperinflation.ThroughOrdinary
LeastSquaresmethod,hyperinflationinZimbabweissaidohavebeencausedbytherapid
growthofpapermoney.Themoneydemandmodelwillseektofindoutifthisresultis
consistent.Additionally,aunitincreaseintheparallelmarketpremiumwillresultinan
equivalentchangeininflation.
Highratesofinterestwilldeterborrowingandfostersaving,slowingtheeconomyand
hencedisinflationaryeffects.TheTreasurybillbytheZimbabwegovernmenthadturnedthe
interestratesnegativeandthismanipulationdiscouragedsavingsbythehouseholds.Asperthe
QuantityTheoryofmoney,hyperinflationinZimbabwecouldhavebeenamonetary
phenomenonandtheonlywaytocurbitwouldbetoconstraintheunnecessarymoneysupply
growth.
Researchplan
HyperinflationinZimbabwehadsevereadverseeffectsontheeconomyinregardto
wealth,savingsanddeposits.Pricesofessentialgoodsandservicesbecameunreachable,

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especiallytothoseoninflexibleincomes.Countermeasuresincludingpricecontrolsandforeign
currenciesbantocontrolthethenescalatinglevelsofinflationandthedevaluationofthe
Zimbabweancurrencyweretaken.Zimbabweshyperinflationwasatitspeakwhenthe
governmentcompelledtheRBZtoissuebanknotesofhigherdenominations,hencefuellingthe
rateofinflation.TheZimbabweandollarvaluediminishedatafasterrateandtheRBZcouldnot
keepupwiththeprinting.ThisledtotheabandonmentoftheZimbabweandollarinfavorofthe
USdollaraswellastheSARand.
ThisstudyaimedatfindingthecausesofhyperinflationinZimbabwebyusingtheright
econometricmodels.Itsmainaimistofindoutifthegrowthofmoneyhasapositiveeffecton
inflation.Additionally,itwillbeaimedatfindingoutwhethertheparallelmarketpremiumis
directlyproportionaltothegrowthofinflation.Whethermoneysupplyistheprimarydriverof
hyperinflationinZimbabwe,thefindingsoftheresearchwillprovidetheanswer.

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Workscited
BBCNews,.'ZimbabweAbandonsItsCurrency'.N.p.,2014.Web.29Dec.2014.
CatoInstitute,.'MeasurementsofZimbabwe'sHyperinflation'.N.p.,2014.Web.29Dec.2014.
Larochelle,C.,J.Alwang,andN.Taruvinga.'InterTemporalChangesInWellBeingDuring
ConditionsOfHyperinflation:EvidenceFromZimbabwe'.JournalofAfricanEconomies23.2
(2014):225256.Web.
McIndoeCalder,Tara.'HyperinflationInZimbabwe:MoneyDemand,SeigniorageAndAid
Shocks'.SSRNJournaln.pag.Web.
Makochekanwa,A.'ADynamicEnquiryIntoTheCausesOfHyperinflationInZimbabwe'.
UniversityofPretoria,DepartmentofEconomics(2007):n.pag.Print.
ReserveBankofZimbabwe(RBZ),.'BankAnnualReportsFrom20002008'.N.p.,2008.Web.
29Dec.2014
Sokic,Alexandre.'TheMonetaryAnalysisOfHyperinflationAndTheAppropriateSpecification
OfTheDemandForMoney'.GermanEconomicReview13.2(2011):142160.Web.
Works,Anchor.'Data'.Carmenreinhart.com.N.p.,2014.Web.29Dec.2014.

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