The Demand for Local Currency Real Money Balances in Zimbabwe: An Error Correction Model

The study seeks to investigate the local currency real money demand function for Zimbabwe for the Multicurrency ZWL period (2019 – 2024) following the re-introduction of the local currency in 2019. The objective is to establish both the long run steady state and the short run adjustment dynamics. Understanding the real money demand function is a prerequisite for optimal monetary policy formulation and implementation. The study applied the Error Correction Model (ECM) methodology to investigate the money demand function using monthly data from 2019:1 – 2024:1. The study findings confirm a stable long run local currency real money demand function which is subject to short run adjustment dynamics. The study findings show that price level shocks on real money demand. Price level shocks lead to elevated real money demand response to short run price level shocks, slow adjustment process and persistence. The real money demand responds positively to real GDP (Scale factor) and inversely related to price level shocks. Short term dynamics (particularly inflation expectations) compound real money demand collapse in response to rising inflation. The study unique contribution is through characterising the impact of price level shocks on the real money demand function and how the pass through effects cascade progressively overtime.