The behaviour of income velocity in Tanzania: implication for monetary policy

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University of Dar es Salaam
The main objective of this study is to empirically examine the behaviour and determinants of income velocity of money in Tanzania during the period from 1967 to 1991. The basic question of this study is to try to examine whether the understanding of the behaviour of income velocity will be useful in the formulation of monetary policy which is appropriate in the Tanzania economy. Four hypotheses have been formulated to test the validity of this question. Methods of analysis employed by this study include both qualitative and quantitative approaches: descriptive statistics and econometric techniques have been used; the econometric analysis employed the OLS (simple OLS). The findings indicated that regardless of any definition of velocity, the econometric analysis reveals a strong and negative relationship between income velocity (V) and per capita real income. The relationship between real interest rate and velocity was found to be negative and insignificant, while C/M ratios are positively related to V1, V2 and V3 but are statistically significant only to Vi,.The study reveals also that there is a negative relation between the three definitions of velocity and the rate of change of prices (the rate of inflation) but the variable is still statistically significant in explaining the behaviour of velocity. Although some of the variables employed in the analysis were statistically significant and others insignificant in determining the behaviour of income velocity the study reveals that, velocity can be used in the formulation of monetary policy only when one can predict its behaviour and the stability. Failure to meet this condition policy formulation may lead into undesired results.
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Income, Monetary policy, Tanzania
Liheta, B. S. A. (1993) The behaviour of income velocity in Tanzania: implication for monetary policy, Masters dissertation, University of Dar es Salaam. Available at (