Micro-price adjustment to the new currency system in Zimbabwe

Nyawo, Mike (2018-03)

Thesis (DCom)--Stellenbosch University, 2018.

Thesis

ENGLISH SUMMARY : This dissertation focuses on market integration, pricing and price-setting behaviour of firms with emphasis on disaggregated consumer price data after the introduction of a new currency system in Zimbabwe. The adoption of a new currency system is critical for thinking about the implications of moving to a new currency system on market integration, mechanisms of price adjustment and price setting behaviour of firms particularly after hyperinflation. Chapter 2 measures the dispersion relative to the Law of One Price (LOP) within Zimbabwe and between Zimbabwe and South Africa, Zimbabwe’s biggest trading partner. Results indicate that it took 18 months for prices to stabilise within Zimbabwe. When we include the border between Zimbabwe and South Africa in the analysis, the study indicates that price convergence was larger within Zimbabwe than between Zimbabwe and South Africa, suggesting that the adoption of the new currency system played a key role in this adjustment process. The chapter shows that the border effect between Zimbabwe and South Africa narrows over time and that exchange rate volatility explains a substantial portion of the border effect. Trade and exchange rate volatility are important in explaining convergence in prices between Zimbabwe and South Africa, but time variation, as captured by year fixed-effects, remains very important suggesting that there are other important factors not captured in the analysis. The second substantive chapter, Chapter 3, investigates price setting behaviour, and the change in this behaviour amongst retail firms in Zimbabwe after the introduction of a new currency system. The chapter uses disaggregated price data, and the calculated frequency, size and probability of price changes, to compare ‘stylised facts’ of price setting behaviour in Zimbabwe to similar countries such as Lesotho and Sierra Leone. There is strong evidence that prices are stickier in Zimbabwe, with retailers on average changing their prices every 3.9 months compared to Lesotho (2.7 months) and Sierra Leone (2.0 months). Furthermore, the paper also analyses the dynamics of price changes over time. Using four month moving averages, results agree with international literature that the variance in inflation is correlated with the size of price changes rather than the frequency of price changes. Lastly, chapter 3 decomposes the frequency of price changes into variation within a given store, variation across stores for a given product and lastly the idiosyncratic shock for a particular product and store. The study illustrates that, across all years, the fraction of variation which is common to all stores selling a particular product accounts for most of the total variation of the frequency of price changes. This gives an indication that retailer characteristics are an important determinant of price changes. Chapter 4 uses a novel natural experiment – the introduction of bond coins in Zimbabwe, to investigate the importance of the face value of a currency as a source of price stickiness. The study exploits three different econometric techniques to assess the impact of the introduction of coins on price flexibility in Zimbabwe. Descriptive statistics show a discontinuous, sharp rise in the frequency of price changes around March 2015, when bond coins were introduced. Results from difference-in-differences, time-regression discontinuity and interrupted time series design estimators show that the introduction of coins in March 2016 led to the downward shift in prices as retailers had more scope to reprice. The study estimates how much the choice of wrong denomination cost the consumers particularly on lower priced products. Using results from the time-regression discontinuity design, we show that inflation was 0.06 percentage points lower as a result of bond coins. Overall, the findings indicate that although the adoption of a new currency system arrested price increases, it came with its own challenges. Prices still remain dispersed and the border effect between Zimbabwe and South Africa is still large. Within Zimbabwe, there is some adjustment process with regards to the frequencies to which firms change prices, with coefficient estimates suggesting that there is a trend associated with adjustment to the new currency system. The introduction of coins in March 2015, 6 years after the new currency system was introduced, increased price flexibility and led to a downward shift in prices. The dissertation argues that the choice of denominating currency is important, particularly when a country adopts a currency which is ‘strong’ in value but less fine in terms of denominations.

AFRIKAANSE OPSOMMING : Hierdie proefskrif fokus op markintegrasie, prysbepaling en prysopstelgedrag van firmas met die klem op onderverdeelde verbruikersprysdata na die bekendstelling van 'n nuwe geldeenheidstelsel in Zimbabwe. Die aanneming van 'n nuwe geldeenheidstelsel is van kritieke belang om te dink oor die implikasies van die verskuiwing na 'n nuwe geldeenheidstelsel op markintegrasie, meganismes van prysaanpassing en prysopstelgedrag van maatskappye, veral na hiperinflasie. Hoofstuk 2 meet die verspreiding relatief tot die Wet van Eenprys (LOP) binne Zimbabwe en tussen Zimbabwe en Suid-Afrika, Zimbabwe se grootste handelsvennoot. Resultate dui daarop dat dit 18 maande duur voordat pryse in Zimbabwe stabiliseer. Wanneer ons die grens tussen Zimbabwe en Suid-Afrika in die analise insluit, dui die studie aan dat pryskonvergentie groter was in Zimbabwe as tussen Zimbabwe en Suid-Afrika, wat daarop dui dat die aanneming van die nuwe geldeenheidstelsel 'n sleutelrol in hierdie aanpassingsproses gespeel het. Die hoofstuk toon dat die grens-effek tussen Zimbabwe en Suid-Afrika mettertyd vernou en dat wisselkoersvolatiliteit 'n aansienlike deel van die grens-effek verklaar. Handels- en wisselkoersvolatiliteit is belangrik om die konvergensie in pryse tussen Zimbabwe en Suid-Afrika te verduidelik, maar tydsveranderings, soos vasgestel deur die jaar vaste-effekte, bly baie belangrik en dui daarop dat die analise ander belangrike faktore vang nie. Die tweede inhoudelike hoofstuk, Hoofstuk 3, ondersoek prysopsetgedrag en die verandering in hierdie gedrag by kleinhandelfirmas in Zimbabwe na die bekendstelling van 'n nuwe geldeenheidstelsel. Hierdie hoofstuk gebruik onderverdeelde prysdata, en die berekende frekwensie, grootte en waarskynlikheid van prysveranderinge, om 'gestileerde feite' van prysinstellingsgedrag in Zimbabwe te vergelyk met soortgelyke lande soos Lesotho en Sierra Leone. Daar is sterk bewyse dat pryse in Zimbabwe stywer is, met kleinhandelaars wat gemiddeld elke 3,9 maande hul pryse verander in vergelyking met Lesotho (2,7 maande) en Sierra Leone (2,0 maande). Verder ontleed die navorsing ook die dinamiek van prysveranderinge oor tyd. Met behulp van vier maand bewegende gemiddeldes stem resultate ooreen met internasionale literatuur dat die variansie in inflasie korreleer met die grootte van prysveranderings eerder as die frekwensie van prysveranderings. Ten slotte ontbind hoofstuk 3 die frekwensie van prysveranderings tot variasie binne 'n gegewe winkel, variasie oor winkels vir 'n gegewe produk en laastens die idiosinkratiese skok vir 'n bepaalde produk en winkel. Die studie illustreer dat die fraksie van die variasie wat algemeen is vir alle winkels wat 'n spesifieke produk verkoop, hoër is as die algemeen en verantwoordelik is vir die grootste deel van die totale variasie van die frekwensie van prysveranderings. Dit gee 'n aanduiding dat kleinhandelaarseienskappe 'n belangrike determinant van prysveranderings is. Hoofstuk 4 gebruik 'n nuwe natuurlike eksperiment - die bekendstelling van verbandmuntstukke in Zimbabwe - om die belangrikheid van die nominale waarde van 'n geldeenheid as 'n bron van prysstyfheid te ondersoek. Die studie gebruik drie verskillende ekonometriese tegnieke om die impak van die bekendstelling van munte oor prysstyfheid in Zimbabwe te beoordeel. Beskrywende statistieke toon 'n diskontinue, skerp styging in die frekwensie van prysveranderings omstreeks Maart 2015, toe verbandmuntstukke ingestel is. Resultate van verskil-in-verskille, tydregressie-diskontinuïteit en onderbrekende tydreeksontwerpskattings dui aan dat die bekendstelling van munte in Maart 2016 gelei het tot afwaartse prysveranderings, aangesien kleinhandelaars meer ruimte gehad het om te herdruk. Die studie skat hoeveel die keuse van verkeerde denominasie die verbruikers kos, veral op laer pryse. Deur resultate van die tyd-regressie-diskontinuiteitsontwerp te gebruik, toon die studie dat inflasie 0,06 persentasiepunte laer was as gevolg van verbandmuntstukke. Algeheel toon die bevindings dat, hoewel die aanvaarding van 'n nuwe geldeenheidstelsel prysstygings getem het, bring dit sy eie uitdagings. Pryse bly steeds versprei en die grens effek tussen Zimbabwe en Suid-Afrika is steeds groot. Binne Zimbabwe is daar 'n aanpassingsproses met betrekking tot die frekwensie waarmee maatskappye pryse verander, met koeffisient skattings wat daarop dui dat daar 'n tendens is wat verband hou met aanpassing aan die nuwe geldeenheidstelsel. Die bekendstelling van munte in Maart 2015, 6 jaar na die invoering van die nuwe geldeenheidstelsel, het prysprysbaarheid verhoog en het gelei tot 'n afwaartse prysverskuiwing. Die proefskrif beweer dat die keuse van geldeenheid denominasie belangrik is, veral wanneer 'n land 'n geldeenheid aanvaar wat sterk, maar minder fyn in terme van denominasie is.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/103313
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