Imported inflation vis-à-vis domestic inflation in a multicurrency system in Zimbabwe

Purpose This paper examines the impact of imported inflation in a multicurrency economy, focusing on Zimbabwe from February 2009 to February 2019. Design/methodology/approach The study employs the autoregressive distributed lag modelling approach and is structured into two distinct phases. These phases occur before and after the implementation of the bond notes, which served as Zimbabwe’s fiat currency. Findings The results demonstrate a significant impact of external variables on Zimbabwe’s inflation. Specifically, South African inflation and international oil prices were key positive drivers of domestic inflationary pressures. The positive relationship with South African inflation highlights the spillover effects from a major trading partner. Similarly, Zimbabwe’s reliance on imported fuel makes it highly susceptible to global oil price fluctuations, which significantly contribute to local inflation. While import prices generally showed a positive association with domestic inflation, some individual effects were not statistically significant. Originality/value This study enhances the understanding of imported inflation dynamics in multicurrency economies by highlighting both the long-term and short-term effects of foreign inflation and commodity prices on domestic inflation. It also provides valuable insights for policymakers, emphasising the importance of regional inflation linkages and the limitations of multicurrency systems in shielding economies from external price shocks.