Demand for money and inflation in Tanzania: 1966-1995

This study aimed at investigating factors that influence the demand for money function in Tanzania. This was motivated by `he deviations between the targeted and actual rates of inflation and money supply growth on the one hand; and, the efforts of the Bank of Tanzania to control the two variables so as to foster economic stability. The specified empirical model for the determinants of the demand for real money balances was estimated by using ordinary least squares (OLS) method; and the data used are annual time series for the 1966-1995 period. The choice of OLS as the appropriate single equation estimation method was dictated by the Unit root and co integration tests, in addition to the weak erogeneity assumption which was made. The results of the two tests made were generated by using PC-GIVE version 8.00. The explanatory power of the estimated model, its significance and the significance of each identified explanatory variable was analyzed. On the basis of the analysis, the conclusion and policy implications have been drawn with respect to the demand for money function and monetary policy in Tanzania. The conclusion revealed that, inflation rate and real income are the most important factors in explaining variation in the demand for money function in Tanzania. The result of the study reveals that the interest rate and economic liberalization do not have significant influence on the demand for money in Tanzania. In the overall, the study reveals that in Tanzania there is little or no substitution between money and financial assets. Instead, a significant substitution exists between money and physical assets. Hence, this suggests that any change in the quantity of money creates immediate expenditures on physical assets.