Stability of money demand function in Tanzania during the reform period.

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University of Dar es Salaam
This study analyses the stability of money demand function using M2 and M3 monetary aggregates over the 1986-2001 period. The analysis begins by examining stationarity and cointegrating relationship among the variables. The long-run parameters of money demand functions for Tanzania's M2 and M3 aggregates are estimated within the framework of vector autoregression. Finally, the stability of the two models is investigated. For each model, a single cointegrating vector is found. The hypothesis that income, inflation, interest rates, and exchange rate are the long-run determinants of the demand for money in Tanzania is not rejected. The short-run money demand equation is analyzed within a small Vector Error Correction framework and the statistical properties of the estimated model are generally good. On stability front, the study suggests that money demand function using M2 and M3 aggregates are generally stable over the sample period. It is worthy citing that the hypothesis that M2 is more stable than M3 is inconclusive. However, testing forecast performance, M3 aggregate seems to be superior to M2 aggregate, providing some positive signs that the M3 model is more stable than the M2 model as it suffers little structural break during the period of estimation. One important policy implication from the results is that monetary targeting by Central Bank of Tanzania (BoT) is feasible and that M3 is the most appropriate target variable for achieving price stability.
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Demand for money, Tanzania
Missango, S. (2003). Stability of money demand function in Tanzania during the reform period. Masters dissertation, University of Dar es Salaam. Available at (