Currency Substitution, Dollarisation and Possibility of De-Dollarisation in Zimbabwe

Abstract

Dollarisation can be a path to economic stability and growth if managed properly. Governments which end up dollarising only do so as a last resort. This paper used both explanatory and empirical approach to explore the nature of currency substitution and dollarisation in Zimbabwe. The paper also discuss the possibility and the requirements for de-dollarisation to take place. The process of dollarization in Zimbabwe was peculiar in that it was not backed by international reserves as is normally the case with countries that have dollarized. The only foreign currency that the government had was from taxation after full dollarisation. Currency substitution is an important phenomenon in countries with high inflation rates, complicating forecasts of money demand and making monetary policy more difficult to conduct. The most important incentive for currency substitution has been change in the domestic inflation rate, though there have been episodes of currency substitution arising for other reasons. Adequate reforms have been emphasized before de-dollarisation.

Keywords: Dollarisation, Currency substitution, Dedollarisation, Currency boards, Bad money,Good money, Gresham’s law, Monetary policy, Monetary regime

JEL Classification: E40, E41, E42, E31, E51, E58, E61, F15, F31, O11, O23