The demand for money in Tanzania: evidence from cointegration tests.

This study has attempted to analyse the stability and predictability of long run money demand for Tanzania. Specifically, the effect of exchange rate liberalisation and currency substitution on long run money demand for Tanzania is examined using the Johansen cointegration methodology. The evidence from the study suggests that the variables entering into the demand for both narrow and broad money equations for a cointegrated system whether exchange rate is included or not included. This is, there exists a long run money demand function for Tanzania, when real gross domestic product, interest rates, inflation and nominal effective exchange rate are included in the system. All the estimated elasticities are found to have correct signs and are statistically significant, except the elasticity for broad money demand with respect to treasury bill rate, which has wrong sign and is insignificant. In particular, the long run effect of change in exchange rate on money demand in Tanzania is negative. Furthermore, it is also observed that interest rate variables play important roles in determining the demand for money in Tanzania. The evidence from this study suggests that both narrow and broad money can be considered as good candidates for a monetary aggregate indicator but broad money targeting is likely to be associated with dynamic instability and interest rate overkill.