National income model for Zimbabwe: A comparative static analysis

Comparative statics is a very useful analytical tool in macroeconomic policy analysis. However, the mathematical technique has not significantly been applied in macroeconomic modelling in Zimbabwe. This paper develops and estimates a national income model for Zimbabwe over a twenty-four-year period (1975–1998) and derives various comparative static derivatives. Results show that government expenditure multiplier, which is equal to the export multiplier, is less than one, mainly reflecting high marginal propensities to tax and import, and the inflationary effect of fiscal expansion. Investment effect is small due to an insignificant interest rate coefficient and a relatively large marginal government recurrent budget. The paper also invokes uncertainty on relative prices and fears of credit squeeze associated with inflationary environments, which apparently balance out with any positive price incentive effect of inflation. Short-term effects of government expenditure or export increase on all withdrawals are greater than long-term effects due to restricted income multiplier, implying that high withdrawals are self-limiting in the long-term. Monetary expansion has insignificant effect on all endogenous variables. The paper makes several recommendations related to the structure of trade restrictions, domestic tax rates and efforts to enhance macroeconomic response capacity to monetary instruments.