Inflation Stability and Foreign Investment: A Stochastic Policy Approach in a Hyperinflationary Context—Evidence from Zimbabwe

This paper develops a dynamic stochastic framework to identify the highest sustainable inflation threshold A that prevents GDP contraction, by optimizing a sequence of central bank interventions {at} influencing investment. We solve the problem max{at} A under nonlinear constraints capturing the feedback between inflation, monetary expansion, and real economic activity. Using a simulation-based algorithm that combines inflation threshold search with adaptive policy optimization, we characterize how strategic investment support can defer inflation-induced downturns. The model provides theoretical guidance for central banks in fragile economies facing inflationary pressure and investment volatility. Our results suggest that when policy is optimally coordinated, Zimbabwe’s economy can sustain inflation rates up to 40% without triggering a GDP decline, thereby highlighting the critical role of timely, targeted interventions in preserving macroeconomic stability.