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Money Demand in Four African Countries

  • David Fielding

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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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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