Zimbabweans in 2008 rejected the Reserve Bank of Zimbabwe (RBZ) introduced higher denomination bearer cheques just before the 30th January 2009 dollarization. More recently the transacting public were cautious in accepting the RBZ’s 18th December 2014 bond coins such that up to now (May 2015) some sections of the economy are still not accepting it as a medium of exchange; more than 4 months after introduction. This essay tries to briefly highlight some of the reasons why (in both instances) economic agents rejected or attempted to reject the currency availed to them despite the logic behind such decisions by the RBZ. It is argued in this essay that reasons for which the economic agents (here in Zimbabwe) rejected or attempt to reject the currency availed to them are fundamentally rooted on the New Classical school of thought.
Zimbabweans in 2008 rejected the Reserve Bank of Zimbabwe (RBZ) introduced higher denomination bearer cheques just before the 30th January 2009 dollarization. More recently the transacting public were cautious in accepting the RBZ’s 18th December 2014 bond coins such that up to now (May 2015) some sections of the economy are still not accepting it as a medium of exchange; more than 4 months after introduction.
This essay tries to highlight some of the reasons why (in both instances) economic agents rejected or attempted to reject the currency availed to them despite the logic behind such decisions by the RBZ.
There are various reasons why economic agents reject or attempt to reject their own currency. In this case Zimbabweans rejected their own RBZ introduced higher denomination bearer cheques just before the 30th January 2009 dollarisation and in another case, more recently; the transacting public is still reluctant to accept the RBZ’s bond coins that were introduced five months ago. The reasons for which the economic agents(here in Zimbabwe) rejected or attempt to reject the currency availed to them are fundamentally rooted on the New Classical school of thought.
New Classical theory emphasizes on the role and importance of the central banks’ reputation and issues to do with confidence, time inconsistency, rational expectations and the credibility of the central bank’s policies for the conduction of monetary policy andthe observed outcomes of the economy. Whilecredibility is associatedwith the degree of confidence that the public has on central bank’s abilityand determination to keep itself on an announced goal and to achieve it, that is, ifthe policies (or plans) are credible, reputation is related to the public’s belief aboutthe preferences of the policymaker and to the expectations formed by the publicabout the actions that monetary authorities will take.
Credibility
In both instances mentioned above, the economic agents rejected or attempted to reject the currency availed to them because of lack of credibility of our central banker, the Reserve Bank of Zimbabwe(RBZ). According to Perrier and Amano (2000) the term credibility refers to the degree of confidence that the public has in the central bank’s determination and ability to meet its announced objectives.So with this definition outlined above, a policy lacks credibility if it is one that could not reasonably be believed.
In the first instance of 2009, economic agents no longer believed in the actions of the central banker, the RBZ; and for that reason, they had to abandon the bearers’ cheques that had dragged the economy into unprecedented levels of inflation now famously known as hyperinflation. The same reason still holds water even today because the central banker now has a bad reputation in terms of macroeconomic mismanagement which has resulted in its loss of credibility.
According to economic theory, a highly credible monetary policy helps to reduce the degree of uncertainty surrounding the objectives of monetary policy. Thus, when the monetary policy pursued by the central bank is credible, shock-induced fluctuations in inflation, interest rates, output, and employment should be less pronounced than in the absence of such credibility, (Perrier and Amano, 2000).
Confidence
In 2009, economic agents rejected the currency availed to them because they had no confidence in the RBZ’s bearer cheques. They already anticipated prices to go up as usual and now they feared the state of the economy which was already suffering from the RBZ-caused hyperinflation of 2008. Economic agents now had confidence in the stability of dollarisation which culminated in the inevitable adoption of the multicurrencydispensation.
Confidence plays a vital role in business cycles and because of that a recovery without confidence is highly unlikely. The New Classical theory also says thatif there is confidence in monetary policy, economic agents will expect the rise in price and cost inflation to be of short duration. Higher prices will then not feed through to prices for other goods and to wages to the same extent, and there will be less risk of a recession.
Moreso, the recent 2014 resistance is also caused by lack of confidence in the RBZ’s monetary policy. Economic agents anticipate prices to go up as the RBZ continues to issue out bond coins. This anticipation is also coupled with another anticipation of the re-introduction of the Zim Dollar ($Z) which is seen as a currency that has no value and can therefore drive back the economy to the widely read hyperinflation of 2008.
Time inconsistency
The 2009 rejection of RBZ’s bearer cheques was also as a result of time inconsistency within RBZ’s monetary policy. Time inconsistent, refers to an attitude or policy that may be considered desirable under the immediate circumstances but that can be harmful in the long run because it causes economic situations to deteriorate. From the perspective of monetary policy, time inconsistency problems arise when the public believes that the central bank is unlikely to achieve all of its announced objectives because they are perceived to be incompatible.
Most central banks have a mandate to preserve the purchasing power of money and to keep the economy in good health. While these objectives may be consistent in the long run, they may not be compatible over shorter horizons because of the relationship between the strength of aggregate demand, inflation, and inflation expectations, (Macklem, 1997).
When the RBZ initially introduced the bearers’ cheques, economic agents arguably accepted them as currency; but it was observed in the longrun that the continued supply of bearer cheques was detrimental to the health of the economy. This is why, at the height of hyperinflation of 2008; economic agents resorted to de facto dollarisation that led to the automatic multicurrency regime. This was purely an issue of time inconsistency on the part of RBZ’s monetary policy.
In the same line of reasoning, the 2014 resistance is also anchored behind time inconsistency. Why? The reason is that in the shorter horizon, bonds coins seem to be compatible but in the long-run they are not since they are a signal to the re-introduction of Zimbabwean dollar ($Z). This is possible and better explained by New Classicals in their rational expectations theory that accounts for (rational) anticipations of inflation by economic agents. This implies that the 2014 resistance is caused by anticipation of the return of (the incompatible) $Z in the longrun.
Reputation
Furthermore, both the 2009 rejection of currency and the 2014 resistance are also a result of the bad reputation earned by RBZ when it failed to control inflation in 2008 and all the periods before. The 2014 resistance could arguably point out to the bad reputation and character of the central in continuing to issue out bond coins (currency) that is being shunned by the transacting public.
However, the alternative (New)Keynesian approach (which is a reaction to the New Classical theory, but in support of the orthodox Keynesian views) involves the agents’ state of perception concerning the preferences of the monetary authority, the actions expected to be taken by the monetary authority, and the monetary authority’s character and characteristics.
When this perception suddenly changes modifications may emerge in the uncertainty perceived, provoking the deterioration of the “state of expectations” of the public through the state of confidence.Reputation and credibility serve as catalysers in the process of convergence of expectations and confidence to the policymakers’ predetermined objectives. Thus the reputation of the central bank and its monetary policy is decisive for the monetary policy effectiveness through expectations.
According to the alternative Keynesian approach, for central banks improve their capacity to affect the “state of expectations” of the agents, and then, through monetary interventions succeed in reaching their predetermined goals as fast as possible and with more effectiveness, they must define and strengthen their reputation and implement efficient and credible policies, without neglecting their capacity and responsibility to improve the economy as a whole; this implies that output and employmentmust not be set apart.
In the recent 2014 resistance or should I say 2015 resistance (since some sections of the economy are still not happy about bond coins), the RBZ is arguably failing to improve their capacity to affect the “state of expectations” of economic agents and is consequently failing to strengthen and rejuvenate its reputation. As a result economic agents, especially the transacting public; have always been attempting to reject the RBZ’s December 2014 bond coins.
Rational expectations
Basing on the New Classicals’ rational expectations theory, if the RBZ increases money supply; economic agents will see what the central bank is doing and raise their expectations of future inflation. This will obviously counteract the explansionary effect of the increased money supply. This is exactly what happened in 2008 when the RBZ continued to issue out bearers’ cheques until the economic agents decided to reject them in February 2009. When the government increased money supply, economic agents raised their future expectations of inflation and the currency perpetrated excessive inflation. However, in the recent 2014 resistance, economic agents are adjusting their expectations of future inflation in light of the introduction of the bond coins. On such grounds, they anticipate prices to go up; for that reason,they are still attempting to reject the bond coins in fear of anticipated inflation.
In conclusion, the New Classical school of thought, a micro-based macroeconomic ideology can help us understand some of the reasons why Zimbabweans have always tried to reject their own currency. Despite the fact that the above issues are not the only reasons that account for such reactions by economic agents; it is important to notice that the same issues also affect any future plans of the re-introduction of $Z by our central banker, RBZ.
REFERENCES
Macklem T (1997): Capacity constraints, price adjustment and monetary policy; Bank of Canada Review, Canada.
Frequently asked questions
What are the reasons behind Zimbabweans rejecting currency issued by the Reserve Bank of Zimbabwe (RBZ)?
Zimbabweans have, on multiple occasions, shown reluctance to accept currency issued by the RBZ. This stems from a lack of credibility, confidence, time inconsistency in monetary policy, and a damaged reputation of the RBZ.
How does credibility affect the acceptance of currency?
Lack of credibility in the RBZ's ability to maintain stable monetary policy leads to the rejection of currency. Economic agents do not believe in the central bank's promises, especially after the hyperinflation of 2008, making them wary of new currency issuances.
Why is confidence important for currency acceptance?
Confidence in the stability and value of the currency is essential. The loss of confidence in the RBZ's bearer cheques in 2009, and in the bond coins introduced in 2014, led economic agents to reject them due to fears of price increases and the re-introduction of a devalued Zimbabwean dollar.
What does time inconsistency mean in this context?
Time inconsistency refers to policies that might seem beneficial in the short term but have detrimental long-term effects. The continued issuance of bearer cheques, though initially accepted, ultimately led to hyperinflation. Similarly, the introduction of bond coins is seen as a precursor to the re-introduction of the Zimbabwean dollar, leading to resistance from the public.
How does the RBZ's reputation play a role?
The RBZ's past failure to control inflation has damaged its reputation, leading to distrust among economic agents. This makes them resistant to new currency issuances, fearing a return to hyperinflationary conditions.
How does the rational expectations theory explain the rejection of RBZ currency?
According to the rational expectations theory, economic agents anticipate future inflation based on the RBZ's actions. When the RBZ increases the money supply (e.g., through bearer cheques or bond coins), economic agents expect inflation to rise and adjust their behavior accordingly, leading them to reject the currency in anticipation of decreased purchasing power.
What can the RBZ do to improve the acceptance of its currency?
To improve acceptance, the RBZ needs to rebuild its credibility and reputation. This involves implementing consistent and transparent monetary policies, demonstrating a commitment to maintaining price stability, and fostering confidence among economic agents. Focusing on improving the overall economy, including employment and output, is also crucial.
What is the significance of the New Classical School of Thought in understanding this situation?
The New Classical school of thought emphasizes the importance of central bank reputation, credibility, rational expectations, and time consistency in understanding macroeconomic phenomena. In this case, it helps explain why Zimbabweans reject currency when they lack confidence in the central bank's ability to maintain a stable monetary policy.
What are some potential consequences of the 2014 bond coin resistance?
The bond coin resistance could signal to the RBZ that the transacting public does not have faith in the current Zimbabwean dollar, or any version of a Zimbabwean currency, and it needs to take steps to improve its overall reputation if it wants a Zimbabwean dollar to be the main currency in the future.
- Quote paper
- Thabani Nyoni (Author), 2015, Reasons for the Rejection of the Zimbabwean Currency, Munich, GRIN Verlag, https://www.grin.com/document/299189
