An Empirical Assessment of the Exchange Rate Pass-Through in Zimbabwe (2019-2023)

Abstract

The purpose of this study is to examine Exchange Rate Pass-Through in Zimbabwe since the re-introduction of the Zimbabwean dollar for the period 2019 to 2023. In particular, the study assesses whether ERPT is complete and symmetric in the context of Zimbabwe. The study adopts the Vector Error Correction Model (VECM) to analyse ERPT in Zimbabwe and compare the effect of the US dollar exchange rate and South African Rand exchange rate on domestic prices. In addition, impulse response function and variance decomposition are used to determine ERPT asymmetry in Zimbabwe. The study results show that ERPT is incomplete as the change in the domestic prices is not proportional to the changes in the exchange rates. The results depict that domestic prices respond more to changes in the South African Rand exchange rate movements compared to the changes in the United States Dollar exchange rate. In addition, ERPT is asymmetric such that depreciation of the local currency results in greater changes in the domestic prices compared to appreciations. The study recommends flexible implementation of a market-driven mechanism for price discovery in foreign exchange auctions.