Micro-price adjustment to the new currency system in Zimbabwe

[摘要] ENGLISH SUMMARY : This dissertation focuses on market integration, pricing and price-setting behaviour of firms with emphasis on disaggregated consumer price data after the introduction of a new currency system in Zimbabwe. The adoption of a new currency system is critical for thinking about the implications of moving to a new currency system on market integration, mechanisms of price adjustment and price setting behaviour of firms particularly after hyperinflation. Chapter 2 measures the dispersion relative to the Law of One Price (LOP) within Zimbabwe and between Zimbabwe and South Africa, Zimbabwe's biggest trading partner. Results indicate that it took 18 months for prices to stabilise within Zimbabwe. When we include the border between Zimbabwe and South Africa in the analysis, the study indicates that price convergence was larger within Zimbabwe than between Zimbabwe and South Africa, suggesting that the adoption of the new currency system played a key role in this adjustment process. The chapter shows that the border effect between Zimbabwe and South Africa narrows over time and that exchange rate volatility explains a substantial portion of the border effect. Trade and exchange rate volatility are important in explaining convergence in prices between Zimbabwe and South Africa, but time variation, as captured by year fixed-effects, remains very important suggesting that there are other important factors not captured in the analysis.The second substantive chapter, Chapter 3, investigates price setting behaviour, and the change in this behaviour amongst retail firms in Zimbabwe after the introduction of a new currency system. The chapter uses disaggregated price data, and the calculated frequency, size and probability of price changes, to compare 'stylised facts' of price setting behaviour in Zimbabwe to similar countries such as Lesotho and Sierra Leone. There is strong evidence that prices are stickier in Zimbabwe, with retailers on average changing their prices every 3.9 months compared to Lesotho (2.7 months) and Sierra Leone (2.0 months). Furthermore, the paper also analyses the dynamics of price changes over time. Using four month moving averages, results agree with international literature that the variance in inflation is correlated with the size of price changes rather than the frequency of price changes. Lastly, chapter 3 decomposes the frequency of price changes into variation within a given store, variation across stores for a given product and lastly the idiosyncratic shock for a particular product and store. The study illustrates that, across all years, the fraction of variation which is common to all stores selling a particular product accounts for most of the total variation of the frequency of price changes. This gives an indication that retailer characteristics are an important determinant of price changes.Chapter 4 uses a novel natural experiment – the introduction of bond coins in Zimbabwe, to investigate the importance of the face value of a currency as a source of price stickiness. The study exploits three different econometric techniques to assess the impact of the introduction of coins on price flexibility in Zimbabwe. Descriptive statistics show a discontinuous, sharp rise in the frequency of price changes around March 2015, when bond coins were introduced. Results from difference-in-differences, time-regression discontinuity and interrupted time series design estimators show that the introduction of coins in March 2016 led to the downward shift in prices as retailers had more scope to reprice. The study estimates how much the choice of wrong denomination cost the consumers particularly on lower priced products. Using results from the time-regression discontinuity design, we show that inflation was 0.06 percentage points lower as a result of bond coins.Overall, the findings indicate that although the adoption of a new currency system arrested price increases, it came with its own challenges. Prices still remain dispersed and the border effect between Zimbabwe and South Africa is still large. Within Zimbabwe, there is some adjustment process with regards to the frequencies to which firms change prices, with coefficient estimates suggesting that there is a trend associated with adjustment to the new currency system. The introduction of coins in March 2015, 6 years after the new currency system was introduced, increased price flexibility and led to a downward shift in prices. The dissertation argues that the choice of denominating currency is important, particularly when a country adopts a currency which is 'strong' in value but less fine in terms of denominations.

[发布机构] Stellenbosch University