The Dyke Vol. 2.1 76 THE DYNAMIC SPECIFICATION OFTHE INFLATION MODEL IN ZIMBABWE By Tafirenyika Sunde 1 Abstract In order to estimate the inflation function in Zimbabwe we used cointegration and error-correction mechanism (a methodology popularized by Hendry etal (1989)). This approach has received extensive empirical support. Right now the approach seems to have generally settled the long-standing problem over the instability of the inflation model (function). Using the above technique, we managed to come up with a stable inflation model for Zimbabwe. This study also established that one must go beyond a simple monetary account of the inflation process even if inflation will always have a monetary dimension. Other factors that were found to be significant in explaining inflation in Zimbabwe are: real output, budget deficit, exchange rate depreciation and interest rates. The results that we got fitted very well all the theoretical priors, and they also concur with the studies done elsewhere for both the developed and the developing countries. Introduction In Zimbabwe inflation throughout the 1980s was relatively low, averaging around 13 percent. Relatively low inflation levels were against the background of a system of administered price controls and generally over-regulated business environment that led to generally depressed economic activity. The liberalisation and deregulation of the domestic economic environment, following the introduction of the Economic Structural Adjustment Programme (ESAP) in 1991, increased the role of market forces in the allocation of resources. Prices became more indicative of the fundamental developments in the economy with the removal of price controls. Against this background, and in an environment of limited competition due to a monopolistic production structure, an upward surge in inflation emerged. After the introduction of the ESAP in 1991, Zimbabwe has seen episodes of high inflation. The policy makers excessively used tight monetary policy to combat inflation, but they failed to reduce it to the desired levels of less than 10%. This suggests that inflation may not always be and everywhere a monetary phenomenon as suggested by Friedman (1969). The preceding Tafirenyika Sunde is Lecturer in the Department of Economics at Midlands State University, Zimbabwe. 73