Foreign Exchange Rate and Inflation in Zimbabwe: 2009 – 2019

Abstract

The loss of an independent monetary policy in Zimbabwe brought about by the introduction of a multicurrency system in 2009 deprived the country of monetary and exchange rate instruments. This meant that the country could not react to asymmetric shocks as well as fluctuations in the business cycle not in line with the anchor. This study focused on the relationship and effects of foreign exchange rate on local inflation rate. The period of study was broken down into two parts, the first being from 2009:02 up until 2014:11 before the introduction of the fiat currency while the second was from 2014:12 up until 2009:02 when the fiat currency was at par with the USD. Overall, exchange rates influenced the inflation rate more during the period that Zimbabwe was solely using a foreign multicurrency economy as compared to the period when it had introduced its pseudo currency in the currency basket.