Money Supply Exogeneity and Endogeneity Under Zimbabwe’s Multiple Currency Regime, 2009 to 2017.

Abstract

The study brings new evidence on money supply determination by inviting the exogeneity and endogeneity debate to a rare monetary system - the multiple currency regime- currently used in Zimbabwe. Using monthly data from January 2009 to May 2017, unit root tests, the Johansen Cointegration test as well as Vector Error Correction Model (VECM) were employed to test long run causality between money supply, bank credit, bank deposits, monetary base and money multiplier. Johansen Cointegration tests confirmed the existence of cointegration amongst the variables. VECM causality tests provide evidence of a strong long run association running all variables to money supply. Further long run causality tests confirmed bidirectional causality between bank credit and money supply, bank credit and bank deposits, bank credit and monetary base. These results endorse that money supply under the multiple currency regime is strongly endogenous in line with the accommodationist and liquidity preference views. Endogenous money supply calls for policy interventions which induces the demand for credit to encourage production. The findings lend support to measures such as the RBZ’s Afrexim Bank Export Incentive Facility. To complement this, the RBZ should come up with a medium to long term import substitution credit facility where producers of import competing goods receive a percentage of their domestic revenue as an incentive bonus to boost domestic production and curb foreign currency leakages.