The demand for money in developing economies: the case of Burundi during the period 1966-1979

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University of Dar es Salaam
The study of the demand for money has increasingly attracted the interest of economists in recent years on theoretical as well as on empirical grounds. Money is indeed known to have an important influence on the level of economic activity. Its role in the determination of income, employment and prices is evident. In the regulation of money supply, the demand for money has fits crucial role to play. Optimal money supply cannot be suitably planned without an accurate estimate of the demand for money. A disturbance in one side gives rise to further induced disturbances which cease to act at the point where a new equilibrium is established, that is, when supply is equal to demand. It is therefore necessary to find out the different determinants of the demand for money because it is only on the basis of such a knowledge that an adequate monetary policy can be applied effectively. However, most of the studies carried out have been on financially developed industrial economies that the most important factors determining the level of money are a scale variable proving the volume of transactions in the economy and an opportunity cost of holding money relevance of proxies for opportunity cost varies across economies depending on structural characteristics. The interest rate may be irrelevant in developing countries, implying that the results on the demand for money in developed economies may be inapplicable to developing economies. Therefore, a separate and independent scrutiny into the demand for money behavior in developing economies is vital. So, besides the scale variable, the rate of inflation, it appears that credit rationing and government deficits have a significant bearing on the demand for money in developing economies. A qualitative analysis (theoretical analysis) and a statistical analysis have been in the first place adopted in the present study. In the second place, the significance of the various factors appearing to determine the demand for money is studied by these of an econometric analysis. The main result supports the conventional strong relationship between the scale variable and the demand for money. As regards the rate of inflation variable, the regression analysis obtains a positive relationship between the above variable and the demand for money. The positive correlation may exist in the case of a sustained inflation in the economy. As for the credit rationing and the government deficit, their relationship with respect to the demand for money albeit weak are of the expected directions, that is negative and positive, respectively. Finally, a test on a homogeneity hypothesis shows that the nominal demand for money is proportional to the price level. In this case, it follows that the price level has not to be taken as an exogenous variable influencing the cereal money balances. The strong significance of the income variable in this study implies that the policy makers should base the regulation of the monetary sector of the economy of Burundi on the income growth. However, the absence of a substantial significance of the credit restraint and the government deficit requires further research in order to draw definite conclusions on the theory of demand for money in developing countries.
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Money, Monetary policies, 1966-1979, Economic aspects, Burundi, Africa
Naho, A. M (1982) The demand for money in developing economies: the case of Burundi during the period 1966-1979, Masters dissertation, University of Dar es Salaam. Available at (