Answer to Question #27327 in Macroeconomics for takudzwa

Question

is inflation in zimbabwe a monetary phenomenon

Answer 1

Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of
private farms. During the height of inflation from 2008 to 2009, it was
difficult to measure Zimbabwe's hyperinflation because the government of
Zimbabwe stopped filing official inflation statistics. However, Zimbabwe's peak
month of inflation is estimated at 6.5 sextillion percent in mid-November 2008.

In 2009, Zimbabwe abandoned its currency. As of 2013, Zimbabwe still has no
national currency; currencies from other countries are used.

Hyperinflation has been halted within months when government takes the
necessary steps. In the meantime, people patronize the black market and
informal market for currencies in which they have more confidence.

The most direct solution is a credible promise to stop printing unlimited
amounts of money. However, Zimbabwean inflation has lasted for five years and
the credibility of any promise is problematic.

Alternatively, the government could declare some foreign currency to be the
nation's official currency. To facilitate commerce, it is less important which
currency is adopted than that the government standardize on a single currency.
The US dollar, the euro, and the South African rand are candidates; the US
dollar has the most credibility and is the most widely traded within Zimbabwe;
or Zimbabwe could join the nearby nations of Lesotho, Namibia, South Africa,
and Swaziland, which constitute the Common Monetary Area, or "Rand
Zone" by formally deciding to use the rand to promote trade and stability.

Short of abandoning the Zimbabwean dollar, Zimbabwe could enact a strict
monetary policy. For example, the government would allow the exchange rate to
float for a period of perhaps 30 days, so that the market would decide its true
value, then declare a fixed exchange rate with the rand and declare the rand a
currency simultaneous with the Zimbabwean dollar. The supply of Zimbabwean
dollars would be limited, perhaps by a currency board such as in Hong Kong,
which has no other constraint than to maintain the fixed exchange rate.

Currently Zimbabwe uses a combination of foreign currencies, but mostly US
dollars. A solution has not been decided on as of 2012, and the economy is
still in a slump.