The Dynamic Impact of Asymmetric Monetary Shocks on the Exchange Rate and Price Level Evolution in Zimbabwe: A Nonlinear Autoregressive Distributed Lag Model

Abstract

Purpose: The study seeks to explore whether the positive or negative shocks to money has symmetrical effects on the exchange rate and price formation in Zimbabwe. Materials and Methods: The methodology follows the Nonlinear Autoregressive Distributed Lag modeling (NARDL) by Shin, Yu, Greenwood and Nimmo (2014). The exchange rate is regressed on the negative and positive changes in reserve money and broad money, using monthly data from 2018M01 to 2023M6. The model explores the impact of money growth on the exchange rate and prices in Zimbabwe. Findings: The findings are that monetary shocks impact on the exchange rate and prices are subject to nonlinearities. Monetary policy formulation based on the assumption of symmetry oversimplifies the relationship between money, the exchange rate and prices. A nonlinear modelling approach appropriately captures the cointegrating long run underlying relationships and has material implications for policy formulation and implementation. Implications to Theory, Practice and Policy: Authorities to consider adopting a nonlinear modelling framework in the formulation and implementation of monetary policy for Zimbabwe. This has potential to optimise on the timing and magnitude of monetary policy changes.