Money demand, network effects and self-selection : essays in development economicss

Abstract

This thesis is comprised of three essays. The first one examines money demand and aid shocks in Zimbabwe, using a new dataset. Zimbabwe has recently experienced record hyperinflation of 80 billion percent a month. This chapter uses new data from Zimbabwe to investigate money demand under hyperinflation using an autoregressive distributed-lag model for the period 1980-2008. The results produce plausible convergence rates and long-run elasticities, indicating that real money balances are cointegrated with the inflation rate and signifying an equilibrium relationship between the two series. Evidence is also presented that suggests prices are being driven by increases in the money supply rather than by changes in price setting behaviour. The essay additionally uses the estimated elasticity on the inflation variable to calculate the maximum level of seigniorage revenue that could be raised in the economy. Actual seigniorage levels increased dramatically after 2000, with inflation eventually exceeding the rate required to maximise this revenue stream. This is discussed in relation to international financing constraints and the collapse of the domestic tax base.