Email this article 
An Econometric Analysis of Demand for Money and its Stability in Tanzania
Abstract
Abstract. This paper examines the determinants of demand for money and its stability in Tanzania using annual time series data spanning from 1966 to 2015. Economic analysis of the money demand function is facilitated by the Johansen cointegration, vector autoregressive-vector error correction model (VAR-VECM) and variance decomposition with the main objective of analyzing the factors which, in both short run and long run, influence its movements. The study is thought to be significant because the demand for real money balances serves as the core link between the monetary policy and the real sector of the economy. Based on the annual data under the period of study, cointegration results reveal that there is a long-run relationship between real money balances and the explanatory variables namely, real GDP, deposit interest rate, real exchange rate and inflation rate. Consistent with money demand theory, the VECM results show that the demand for real money balances is positively related with scale variable (real GDP) but it responds inversely to opportunity cost of holding money (deposit interest rate and inflation rate). Moreover, results provide evidence that the demand for real money balances and real exchange rate are positively associated. Furthermore, after incorporating the stability tests, the empirical results show that real money demand function is stable over the 1966-2015 period, suggesting that it is possible to use the narrow money aggregate as target of monetary policy in Tanzania.
Keywords. Money demand, VAR-VECM model, Stability.
JEL. C32, E41, E52.Keywords
Full Text:
Zotero
MendeleyReferences
Adam, C. (1992). On the dynamic specification of money demand in Kenya. Journal of African Economies, 1(2), 233-270. doi. 10.1093/oxfordjournals.jae.a036750
Adam, C., Kessy, P., Nyella, J.J., & O'Connell, S. A. (2012). The demand for money in Tanzania. Tanzanian Economic Review, 2(1), 1-34.
Akinlo, A.E. (2006). The stability of money demand in Nigeria: an autoregressive distributed lag approach. Journal of Policy Modeling. 28(4), 445-452. doi. 10.1016/j.jpolmod.2005.09.001
Anoruo, E. (2002). Stability of the Nigerian M2 money demand function in the SAP period. Economics Bulletin, 14(3), 1-9.
Arango, S., & Nadiri, M.I. (1981). The demand for money in open economy. Journal of Monetary Economics, 7(1),69-83. doi. 10.1016/0304-3932(81)90052-0
Arango, S., & Nadiri, M.I. (1981). Demand for money in open economies. Journal of Monetary Economics, 7(1),69-83. doi. 10.1016/0304-3932(81)90052-0
Arize, A.C., Malindretos, J., & Shwiff, S.S. (1999). Structural breaks, cointegration, and speed of adjustment evidence from 12 LDCs money demand. International Review of Economics & Finance, 8(4), 399-420. doi. 10.1016/S1059-0560(99)00025-8
Arize, A.C., Darrat, A.F., & Meyer, D.J. (1990). Capital mobility, monetization and money demand: evidence from Africa. The American Economist, 34(1), 69-75. doi. 10.1177/056943459003400108
Bahmani-Oskooee, M., & Rehman, H. (2005). Stability of the money demand function in Asian developing countries. Applied Economics, 37(7), 773-792. doi. 10.1080/0003684042000337424
Bahmani-Oskooee, M., & Gelan, A. (2009). How stable is the demand for money in African countries? Journal of Economic Studies, 36(3), 216-235. doi. 10.1108/01443580910983825.
Bahmani-Oskooee, M., & Malixi, M. (1991). Exchange rate sensitivity of the demand for money in developing countries. Applied Economics, 23(8), 1377-1384. doi. 10.1080/00036849100000060
Bahmani-Oskooee, M., & Shin, S. (2002). Stability of the demand for money in Korea. International Economic Journal, 16(2), 85-95. doi. 10.1080/10168730200000015
Bahmani‐Oskooee, M., & Tanku, A. (2006). Black market exchange rate, currency substitution and the demand for money in LDCs. Economic Systems, 30(3), 249-263. doi. 10.1016/j.ecosys.2006.04.001
Bahmani-Oskooee, M., & Ng, R.C.W. (2002). Long-run demand for money in Hong Kong: an application of the ARDL model. International Journal of Business and Economics, 1(2), 147-155.
Baumol, W.J. (1952). The transactions demand for cash: an inventory theoretic approach. Quarterly Journal of Economics, 66(4), 545-556. doi. 10.2307/1882104
Bohl, M.T. (2000). Nonstationary stochastic seasonality and the German M2 money demand function. European Economic Review, 44(1), 61-70. doi. 10.1016/S0014-2921(98)00068-3
Brown, R.L., Durbin, J., & Evans, J.M. (1975). Techniques for testing the constancy of regression relations over time. Journal of the Royal Statistical Society, Series B, 37(2), 149-163.
Cagan, P. (1956). The monetary dynamics of hyper-inflation, in M. Friedman (ed.), Studies in the Quantity Theory of Money, University of Chicago Press, Chicago.
Cuthbertson, K., & Barlow, D. (1991). Money Demand Analysis: An Outline, in Taylor, M.P. (ed.) Money and financial markets, Cambridge MA: Basil Blackwell Inc.
Darrat, A. (1986). The demand for money in some major OPEC members: regression estimates and stability results. Applied Economics, 18(2), 127-142. doi. 10.1080/00036848600000019
Dickey, D.A., & Fuller, W.A. (1981). Likelihood ratio statistics for auto-regressive time series with a unit root. Econometrica, 49(4), 1057-1072. doi. 10.2307/1912517
Dickey, D.A., & Fuller, W.A. (1979). Distribution of the estimators for autoregressive time series with unit root. Journal of the American Statistical Association, 74(366a), 427-431. doi. 10.1080/01621459.1979.10482531
Dritsaki, C., & Dritsaki, M. (2012). The stability of money demand: some evidence from Turkey. The IUP Journal of Bank Management, 10(4), 7-28.
Engle, R.F., & Granger, C.W.J. (1987). Cointegration and error correction: representation, estimation, and testing. Econometrica, 55(2), 251-276. doi. 10.2307/1913236
Fielding, D. (1994). Money demand in four African countries. Journal of Economic Studies, 21(2), 3-37. doi. 10.1108/01443589410062968
Fisher, I. (1911). The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crisis. New York: Macmillan.
Fisher, I. (1930). The theory of interest. New York: Macmillan
Friedman, M. (1956). The quantity theory of money-a restatement. (pp.3-21), In: M. Friedman, (Ed.), Studies in the Quantity Theory of Money. University of Chicago Press, Chicago.
Gaurisankar, S., & Kwie-Jurgens, N.O. (2012). The money demand function in Suriname. Presented at the 44th Annual Monetary Studies Conference, November 7-9.
Gerlach, S., & Svensson, L. (2004). Money and inflation in the Euro area: a case for monetary indicators. Journal of Monetary Economics, 50(8), 1649-1672. doi. 10.1016/j.jmoneco.2003.02.002
Ghartey, E.E. (1998). Monetary dynamics in Ghana: evidence from cointegration, error correction modelling, and exogeneity. Journal of Development Economics, 57(2), 473-486. doi. 10.1016/S0304-3878(98)00096-0
Gibson, W.E. (1970). Price-expectations effects on interest rates. Journal of Finance 25(1), 19-34. doi. 10.1111/j.1540-6261.1970.tb00410
Goldfeld, S.M. (1994). Demand for money: empirical studies, in P. Newman, M. Milgrate & J. Eatwell (Eds) The New Palgrave Dictionary of Money & Finance, Macmillan Press: London.
Halicioglu, F., & Ugur, M. (2005). On stability of the demand for money in a developing OECD country: the case of Turkey, Global Business and Economics Review, 7(2/3), 203-213. doi. 10.1504/GBER.2005.007616
Hoffman, D., Rasche, R.H., & Tieslau, M.A. (1995). The stability of long-run money demand in five industrial countries. Journal of Monetary Economics, 35(2), 317–339. doi. 10.1016/0304-3932(95)01189-U
Hossain, A. (1994). The search for a stable money demand function for Pakistan: an application of the method of co-integration. The Pakistan Development Review, 33(4), 969-983.
Jammeh, K. (2012). Long-run and short-run determinants of demand for money and its stability in the Gambia: an empirical investigation. B.Sc. Research Project, Department of Economics and Management Science, University of the Gambia.
Johansen, S. (1992). Determination of cointegration rank in the presence of a linear trend. Oxford Bulletin of Economics and Statistics, 54(3), 383-397. doi. 10.1111/j.1468-0084.1992.tb00008.x
Johansen, S., & Juselies, K. (1990). Maximum likelihood estimation and inferences on co-integration. Oxford Bulletin of Economics and Statistics, 52(2), 169-210. doi. 10.1111/j.1468-0084.1990.mp52002003.x
Kallon, K. (1992). An econometric analysis of money demand in Ghana. Journal of Developing Areas, 26(4), 475-488.
Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. Volume VII, Cambridge: MacMillan.
Khan, M.A., & Sajjid, M.Z. (2005). The exchange rate and monetary dynamics in Pakistan: An autoregressive distributed lag model (ARDL) approach. The Lahore Journal of Economics, 10(2), 87-99.
Kjosevski, J. (2013). The determinants and stability of money demand in republic of Macedonia. Zbornik Radova Ekonomskog Fakulteta u Rijeci, 31(1), 35-54.
Kumar, S., Don, J.W., & Fargher, S. (2013). Money demand stability: a case study of Nigeria. Journal of Policy Modeling, 35(6), 978-991. doi. 10.1016/j.jpolmod.2013.03.012
Laidler, D.E.W. (1977). The demand for money: theories and evidence. 2nd ed. London: Harper & Row.
Li, C. (2007). Essays on the inventory theory of money demand. Ph.D. Thesis, Faculty of Graduate Studies (Economics), The University of British Columbia.
MacKinnon, J.G., Haug, G.A., & Michelis, L. (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics, 14(5), 563-577. doi. 10.1002/(SICI)1099-1255(199909/10)14:5<563::AID-JAE530>3.0.CO;2-R
Maravić, J., & Palić, M. (2005). Econometric analysis of money demand in Serbia, Belgrade: National Bank of Serbia Research Department.
Marshall, A. (1923). Money, Credit and Commerce. London, Macmillan.
McNown, R., & Wallace, M. S. (1992). Cointegration tests of a long-run relation between money demand & the effective exchange rate. Journal of International Money and Finance, 11(1), 107-114. doi. 10.1016/0261-5606(92)90024-R
Meiselman, D. (1962). The term structure of interest rates. Prentice-Hall Inc, N.J
Metin, K. (1994). Modelling the demand for narrow money in Turkey, METU Studies in Development, 21(2), 231-256.
Moosa, I. (1992). The demand for money in India: a cointegration approach. The Indian Economic Journal, 40(1), 101-115.
Mundell, A.R. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29(4), 475-485. doi. 10.2307/139336
Nachega, J.C. (2001). A cointegration analysis of broad money demand in Cameroon, International Monetary Fund, WP/01/26, 1-39. doi. 10.5089/9781451844382.001
Nell, K.S. (2003). The stability of M3 money demand and monetary growth targets: the case of South Africa. Journal of Development Studies, 39(3), 155-180. doi. 10.1080/00220380412331322861
Nwafor, F., Nwakanma, H., Nkansah, P., & Thompson, F. (2007). The quantity theory of money in a developing economy: empirical evidence from Nigeria. African Economic and Business Review, 5(1), 1-9.
Nwaobi, G. (2002). A vector error correction and nonnested modeling of money demand function in Nigeria. Economics Bulletin, 3(4), 1-8.
Owoye, O., & Onafowora, O.A. (2007). M2 targeting, money demand, and real GDP growth in Nigeria: Do rules apply?. Journal of Business and Public Affairs, 1(2), 1-20.
Payne, J.E. (2000). Post stabilization estimates of money demand in Croatia: the role of exchange rate and currency substitution. Ekonomski Pregled, 51(11-12), 1352-1368.
Pigou, A.C. (1917). The value of money. The Quarterly Journal of Economics, 32(1), 38-65. doi. 10.2307/1885078
Poole, W. (1970). The optimal choice of monetary policy instruments in a simple macro model. Quarterly Journal of Economics, 84 (2), 197-216. doi. 10.2307/1883009.
Pradhan, B.K., & Subramanian, A. (1997). On the stability of the demand for money in India. The Indian Economic Journal, 45(1), 106-117.
Rao, B.B. & Kumar, S. (2009a). A panel data approach to the demand for money and the effects of financial reforms in the Asian countries. Economic Modelling, 26(5), 1012-1017. doi. 10.1016/j.econmod.2009.03.008
Rao, B.B., & Kumar, S. (2009b). Cointegration, structural breaks and demand for money in Bangladesh. Applied Economics, 41(10), 1277-1283. doi. 10.1080/00036840701367671
Rao, B.B., Tamazian, A. & Singh, P. (2009). Demand for money in the Asian countries: a systems GMM panel data approach and structural breaks. [Retrieved from].
Sargent, T.J. (1969). Commodity price expectations and the interest rate, In: W.E. Gibson, & G.G. Kaufman, (ed.). Monetary economics: readings on current issues, Mc Graw Hill Book Co, NY.
Simmons, R. (1992). An error-correction approach to demand for money in five African developing countries. Journal of Economic Studies, 19(1), 29-48. doi. 10.1108/01443589210015935
Sriram, S.S. (1999). Demand for M2 in an emerging-market economy: an error-correction model for Malaysia. International Monetary Fund, WP/99/173, 1-49. doi. 10.5089/9781451858617.001
Sterken, E. (2004). Demand for money and shortages in Ethiopia. Applied Economics Letters, 11(12), 759-769. doi. 10.1080/1350485042000245511
Suliman, S.Z. & Dafaalla, H.A. (2011). An econometric analysis of money demand function in Sudan: 1960-2010. Journal of Economics and International Finance, 3 (16), 793-800. doi. 10.5897/JEIF11.122
Teriba, O. (1974). The demand for money in the Nigerian economy: some methodological issues and further evidence. Nigeria Journal of Economic and Social Studies, 16(1), 153-164.
Thomas, R.L. (1993). Introductory Econometrics: Theory and Applications. 2nd ed. Longman.
Tobin, J. (1956). Interest elasticity of the transactions demand for cash. Review of Economics and Statistics, 38(3), 241-247.
Tobin, J. (1958). Liquidity preference as behavior towards risks. The Review of Economic Studies, 25(2), 65-86. doi. 10.2307/2296205
Valadkhani, A. (2008). Long- and short-run determinants of the demand for money in the Asian-Pacific countries: an empirical panel investigation. Annals of Economics and Finance, 9(1), 47-60.
Weliwita, A., & Ekanayake, E.M. (1998). Demand for money in Sri Lanka during the post-1977 period: a cointegration and error correction analysis. Applied Economics, 30(9), 1219-1229. doi. 10.1080/000368498325101
DOI: http://dx.doi.org/10.1453/ter.v4i3.1314
Refbacks
- There are currently no refbacks.
.......................................................................................................................................................................................................................................................................................................................................
Turkish Economic Review - Turk. Econ. Rev. - TER - www.kspjournals.org
ISSN: 2149-0414
Editor: [email protected] Secretarial: [email protected] Istanbul - Turkey.
Copyright © KSP Library
