The impact of stock market development on money demand in Tanzania (1999 – 2007)

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University of Dar es Salaam
The performance of the Dar es Salaam Stock Exchange (DSE) since its inception in 1998 followed liberalization of the financial sector in 1991 has been very positive and has also demonstrated that there is huge untapped potential financial capital within the country. For this reason, this study aimed at assessing the impact of stock market development on money demand in Tanzania from 1999 to 2007 period using quarterly time series data. The study employs econometric analysis in which the error correction model (ECM) is applied to analyse both money demand functions with and without DSE variable. The results indicated that real GDP in both long run and short run estimation is relevant variable for explaining the variations in the demand for money in Tanzania where as stock market in terms of past market capitalization (first lag of market capitalization) is relevant variable in the short run estimation. There is significant evidence that stock market development in Tanzania has negative impact on the money demand function in the short run via lagged market capitalization. In terms of stability of the money demand function, results shows that the short run estimation of the demand for narrow money (M1) with DSE variable and the demand for broad money (M2) without DSE variable are not stable, such instability can reduce the reliability of money demand function in Tanzania and hence affecting the reliability of the conduct of monetary policy.
Available in print form, East Africana Collection, Dr. Wilbert Chagula Library Class Mark (THS EAF HG5847.A56)
Stock market, Stock exchange, Dar es salaam Stock Exchange (DSE), Money demand, Demand for money, Tanzania
Amoury, A