Monday, August 18, 2008

Adventures in numeraire choices 

In Zimbabwe, the new currency of choice as a medium of exchange (and soon as a unit of account?) will be gas coupons.

Bidders (at a car auction) must put down a deposit of 1,000 liters (220 gallons) of gas coupons, worth about $1,500 at the current gas price in Zimbabwe, and pay the rest in coupons when they pick up their purchases.

Zimbabweans face acute shortages of local currency. Already gas coupons can be used to pay some household accounts. Many businesses also pay workers part of their earnings in scarce foodstuffs, or demand dollars for purchases, which is illegal.

It's worth remembering that this currency shortage doesn't mean that there's not enough currency. Rather, there is so much money that nobody wants to use it. (cf. Hans Sennholz.)

From the same story, the removal of zeroes from the currency had as expected no effect, but

Obsolete coins also have been revalued, sending Zimbabweans hunting for coins they squirreled away in recent years.

Shops battled to count heaps of coins, causing long lines at checkout counters. One enterprising Harare business on Tuesday advertised coin weighing machines that even banks had discarded after coins went out of circulation in 2002.

Shopping and visits to cafes and restaurants became further confused this week by a range of different exchange rates used against the U.S. dollar.

On Wednesday, banks quoted the official exchange rate at about 10 new Zimbabwe dollars (1 billion old Zimbabwe dollars) to a single U.S. dollar. Businesses quoted an exchange rate in new dollars of between 25-1 and 100-1.

There is thus not only uncertainty about which currency gets used as the medium of exchange, but also what numeraire to use. At these levels, the output costs of hyperinflation must be huge.

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