5. Effects of Central Bank Foreign Exchange Market Interventions on Money Supply in Zimbabwe

The study analyzed the effects of the foreign exchange (FX) market interventions by the central bank on the growth of money supply and whether the interventions are sterilized in Zimbabwe. The specific objectives included examining the effects of foreign exchange interventions (FXIs) on the growth of money supply in Zimbabwe, determining whether the interventions by the Reserve Bank of Zimbabwe (RBZ) were sterilized or not, and examining the effectiveness of the RBZ’s interventions on the foreign exchange market in Zimbabwe. The Autoregressive Distributed Lag (ARDL) approach was adopted using monthly time series data, after the official dollarization period (October 2018 to March 2022). The study observed a significantly negative relationship between money supply and parallel exchange rates due to monetary policy actions by the central bank. In the long run, the existence of a direct relationship between inflation rate (proxies by the consumer price index (CPI)) and the growth in money supply implies that any permanent increase in the money supply could eventually lead to a more than proportional increase in prices. The study also concluded that the RBZ interventions were unsterilized, given that the interventions, as represented by changes in net foreign assets (NFAs), had a positive relationship with money supply and that the actions by the RBZ have not been effective in ensuring exchange rate and inflation stability. The study recommended the RBZ to embark on contractionary monetary policies and consistent monetary policies, which will assist in minimizing the destabilization of the macroeconomic environment by lowering speculative behaviors and inflation expectations, among others.