Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.11, No.10, 2020 119 Reexamination of Parallel Foreign Exchange and Real Estate Markets, Inflation and Monetary Policy Nexus in Zimbabwe 1998-2007 Juniours Marire Department of Economics and Economic History, Rhodes University, P. O. Box 94, Grahamstown, , South Africa, 6140 The research is not financed Abstract History that is ignored is very vengeful. The paper tests the claim by the central bank governor, who presided over hyperinflation in 2004-2008, that inflation was mainly driven by speculation and shadow printing of money in the financial system. Mutually reinforcing corporate incest manifesting in the real estate sector, banking sector, parallel foreign exchange market and the Zimbabwe stock exchange underpinned hyperinflation dynamics before and during his term of office. Speculative activities in these sectors drove money supply growth, parallel exchange rate premium and so, inflation. Existing studies have not tested his hypothesis and summarily have dismissed it arguing that hyperinflation was a doing of the central bank’s monetary indiscipline. Using ARDL models we establish long run relationships amongst the building materials price index, consumer price index, parallel exchange rate and broad money supply. We also find bidirectional causality between money supply and the consumer price index as well as between the building materials price index and money supply. We find causation running from building materials index to consumer price index; from parallel exchange rate to consumer price index; and from broad money to parallel exchange rate. Our findings, to a considerable extent, not only confirm the governor’s argument, but also confirm existing narratives of monetary indiscipline in explaining hyperinflation. Keywords: Reserve Bank of Zimbabwe, Gideon Gono, Inflation, Building Materials Index, CPI, Parallel Exchange rate, ARDL DOI: 10.7176/JESD/11-10-14 Publication date:May 31 st 2020 1. Introduction Zimbabwe has continued to fall at the stumbling block, hyperinflation. Reasons for hyperinflation are varied and literature has suggested that monetary indiscipline is the bedrock of inflation dynamics in Zimbabwe. Excessive government consumptive spending financed through printing of money is the main driver. Literature also concedes that the parallel exchange rate played an important role in inflation expectations formation (Kararach & Otieno, 2016; McIndoe-Calder, 2018). A number of works have used Quantity Theory of Money (QTM) based explanations to argue that inflation has been a monetary phenomenon mostly. However, in a context where they find bidirectional causality they still ignore that and invoke QTM based explanations. It is important to note that the QTM models assumes unidirectional causality from money supply to inflation. The moment bidirectional causality is established, QTM based explanations become problematic. The former governor of the central bank, Gideon Gono, claimed that scholars had turned a blind eye to the multifaceted nature of inflation drivers in Zimbabwe during his tenure. His argument suggested that inflation drivers were substantially driven by market indiscipline in addition to supply-side shocks because of failing agriculture after the chaotic land reform, underutilization of capacity, and irrational exuberance in financial, parallel foreign exchange and Zimbabwe stock markets (Gono, 2008). Corporate incest in the financial system saw shadow printing of money and abuse of quasi- fiscal facilities provided by the central bank (Gono, 2008). The verdict in academic circles, however, has remained resolute that it was monetary indiscipline by the central bank that underpinned inflation, of which an excellent review of hyperinflation in Zimbabwe making this point clearly is Kararach & Otieno (2016). Chances of success in appealing against this verdict are considered non-existent. Some thinkers have argued that rent seeking and political manipulation of the central bank in the age of Mugabeism was, and continues to be, the fundamental problem (Dawson & Kelsall, 2012; Ndlovu-Gatsheni, 2015). The game of political survival therefore dictated pillaging of the central bank and the end result was hyperinflation. The pillaging of the central bank also led to hysteria in parallel foreign exchange market and the Zimbabwe Stock Exchange. The collapse of aggregate supply, frequent droughts, persistent fuel shortages and ailing critical state-owned enterprises such as the power utility and railways largely because of militarization (Rupiya, 2011) were also considered important contributors. Setting aside data quality and availability issues, the paper tests the central bank governor’s claim that it was the trilateral relationship amongst parallel foreign exchange market, real estate market, and stock market that underpinned the hyperinflation inferno. We demonstrate in the paper that to a considerable extent the governor’s claims have substance even though that does not confute the verdict that monetary indiscipline was also a major