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Money Demand in Four African Countries

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  • David Fielding

Abstract

Uses recently developed techniques in the estimation of non-stationary time series to construct money demand functions for four African economies, using quarterly data. Finds that money demand depends not only on income, inflation and interest rates, but also on variability of inflation and interest rates: the more variable the return to an asset, the lower its demand. Reports the first quarterly models of money demand (as far as we are aware) in Cameroon, Nigeria and Ivory Coast. Finds that the model for Kenya encompasses existing models. The estimated models have important policy implications. Since high inflation tends to be associated with highly variable inflation, any calculation of the seignorage-maximizing rate of inflation which ignores the variability effect will overestimate the optimal rate of inflation. Insofar as membership of a monetary union reduces not only the rate of inflation but also its variability, there are extra gains from membership of such a union (Cameroon and Ivory Coast are Franc Zone members; Nigeria and Kenya are not). However, the heter-ogeneity of the estimated functions suggests that it would be very difficult to have an effective monetary policy were the four countries considered members of the same monetary union.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 21 (1994)
Issue (Month): 2 (May)
Pages: 3-37

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Handle: RePEc:eme:jespps:v:21:y:1994:i:2:p:3-37

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Related research

Keywords: Africa; Econometrics; Inflation; Monetary union; Money markets; Time series;

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Cited by:
  1. Subramanian S. Sriram, 1999. "Survey of Literatureon Demand for Money," IMF Working Papers 99/64, International Monetary Fund.
  2. Catherine A. Pattillo & Stephen A. O'Connell & Christopher Adam & Edward F. Buffie, 2004. "Exchange Rate Policy and the Management of official and Private Capital Flows in Africa," IMF Working Papers 04/216, International Monetary Fund.
  3. Afees Salisu & Idris Ademuyiwa & Basiru Fatai, 2013. "Modelling the Demand for Money in Sub-Saharan Africa (SSA)," Economics Bulletin, AccessEcon, vol. 33(1), pages 635-647.
  4. Christopher Adam, 2006. "Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries," Economics Series Working Papers WPS/2006-04, University of Oxford, Department of Economics.
  5. Saten Kumar & Don J. Webber & Scott Fargher, 2010. "Money demand stability: A case study of Nigeria," Working Papers 1015, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  6. Asongu Simplice, 2012. "Financial development dynamic thresholds of financial globalization: evidence from Africa," Working Papers 12/020, African Governance and Development Institute..
  7. Rao, B. Bhaskara & Kumar, Saten, 2010. "Error-Correction Based Panel Estimates of the Demand for Money of Selected Asian Countries with the Extreme Bounds Analysis," MPRA Paper 27263, University Library of Munich, Germany.
  8. Magnus Saxegaard, 2006. "Excess Liquidity and the Effectiveness of Monetary Policy," IMF Working Papers 06/115, International Monetary Fund.
  9. Maria Soledad Martinez Peria, 2002. "The Impact of Banking Crises on Money Demand and Price Stability," IMF Staff Papers, Palgrave Macmillan, vol. 49(3), pages 1.
  10. Buffie, Edward F. & O'Connell, Stephen A. & Adam, Christopher, 2010. "Fiscal inertia, donor credibility, and the monetary management of aid surges," Journal of Development Economics, Elsevier, vol. 93(2), pages 287-298, November.
  11. Emmanuel Anoruo, 2002. "Stability of the Nigerian M2 Money Demand Function in the SAP Period," Economics Bulletin, AccessEcon, vol. 14(3), pages 1-9.
  12. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.
  13. Sriram, Subramanian S., 2002. "Determinants and stability of demand for M2 in Malaysia," Journal of Asian Economics, Elsevier, vol. 13(3), pages 337-356.

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