An ISLM model for zimbabwe and macroeconomic policy implications

This study constructs a partially open macroeconomic model (ISLM model) for Zimbabwe, which takes into account imports and exports. By simultaneous-equation approaches, the paper derives estimates of parameters of the IS and LM equations. These estimates have important implications for demand management and growth policy. This is a very important issue for investigation currently in Zimbabwe, because the country is attempting to come out of a recession lasting more than a decade. An understanding of structural conditions that existed before the recession fully set in is critical in making decisions on how to get out of it. The study is, therefore, based on data from 1975 to 1998. The results show that the IS curve is vertical due to the insensitivity of investment to interest rate. The income coefficient in the LM equation, albeit consistent with theory, is insignificant, leaving the LM curve very gentle. The results clearly support a fiscal policy driven growth. A fiscal expansion focused on development of productive resources and efforts to curb corruption and rent seeking, and a monetary policy that encourages productive borrowing, are recommended in order to minimize the inflationary effects of fiscal expansion.