Empirical Test of the Relationship Between Exchange Rate and Inflation in Zimbabwe

Abstract

This research looks into the empirical relationship between exchange rate and inflation in Zimbabwe during the period 1980 to 2007. Using Granger Causality test estimated results reveal that both the exchange rate and inflation have long run relationship. On the other hand, inflation and exchange rate are found to Granger-cause each other during the period under consideration. Based on results of the research, appropriate policies can then be drawn given insight to how exchange rate can perform its roles without necessarily leading to inflation and we recommend the policy makers should try to cushion the effect of inflation on the economy when the need arises so that rise in exchange rate will not lead to inflationary pressure.

Key Words: Exchange rate, Inflation, Granger Causality test, Policy