An Analysis of the relationship between exchange rates, inflation, and interest rates: Case study of Zimbabwe
- Author
- Mahamba, Susan F.
- Title
- An Analysis of the relationship between exchange rates, inflation, and interest rates: Case study of Zimbabwe
- Abstract
- This study analysed the relationship between interest rates, inflation, and Zimbabwe's exchange rate from 1994 to 2023. Auto Regressive Distributed Lag model was used to investigate short- and long-term correlations between the exchange rate and macroeconomic variables such as inflation, interest rates, foreign direct investment, economic growth, and unemployment rate. The analysis employed testing using the Unit root test, Correlation tests, and cointegration test in analysing the validation of the model against the variables. Error Correction Model and long-run bound test were used to estimate the relationship between exchange rate, inflation, and interest rates in Zimbabwe. Short-term interest rates favourably affected the exchange rate, whereas inflation had the negative effect. Foreign Direct Investment had a short-term positive impact on the currency rate, whereas unemployment and economic development had a short-term negative impact. The Zimbabwean exchange rate is positively influenced in the short-run by lending interest rates (LINRT) and inflation FDI; that is, an increase in these variables raises the exchange rate, and additionally the exchange rate is influenced in the short-run mostly by the fluctuations in inflation. Long-term correlations showed a favourable long-term dynamics between the exchange rate, inflation, unemployment and foreign direct investment, whereas interest rates had an adverse long-term influence. Granger Causality studies established bidirectional linkages in the short-run dynamics amongst exchange rate and inflation, as well as unemployment rate and gross domestic products. The research recommends Zimbabwe to utilize the US dollar and the South African Rand as its principal currencies to limit the economy's exposure to exchange rate fluctuations. Furthermore, Government is advised to take into consideration joining the Rand Monetary Union to promote economic integration stability and reduce the rise of Exchange rate in the Economy.
- Date
- June 2024
- Publisher
- BUSE
- Keywords
- Relationship Interest Rates
- Inflation
- Auto Regressive Distributed Lag model
- Supervisor
- Dr. M. Magodora,
