Behaviour of demand for money function: a case study of Tanzania 1967-1990
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Date
1994
Authors
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Journal ISSN
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Publisher
University of Dar es Salaam
Abstract
This study aims at investigating the behaviour of demand for money function in Tanzania during the period of 1967-1990. The purpose of the study is to examine the conduct and effectiveness of monetary policy in Tanzania. Particular attention is drawn on the policy reform measures which were introduced effective from 1986 to address the economic crisis which Tanzania has been experiencing. The examination was carried out by testing the hypothesis that demand for money function has been unstable during the period under study. Stability of demand for money function is significant because its volality affect the velocity and as result the transmission mechanism of change in money supply becomes unpredictable and thus creates problems in the effectiveness of monetary policy. In this study, the Econometric estimation technique of Ordinary Least Squares has been used to estimate the demand for money function in Tanzania. The estimated demand for money function has been subjected to stability test in ascertaining its behaviour. The stability tests used are Chow, the Dummy Variable Approach (also referred to as Guota Test) and the Theil Inequality Coefficient test. The results have, according to the Chow and Dummy Variable Approach tests, confirmed the hypothesis that demand for money function in Tanzania is an unstable function. However, the results of the Theil inequality coefficient test reject the hypothesis. The empirical results obtained from this study and those obtained from the recent previous study suggest that the behaviour of demand for money function was characterized by instability during the 1967-1990 period. Why the demand for money function in Tanzania is unstable may be attributed to the change in economic agents behaviour in relation to the desire to holding real money balances. Particularly the response of individuals to changed economic environment, and the price rigidities inherent in economy and/or the inadequate policy measures adopted in the period of the above mentioned factors, influence the behaviour of demand for money. In this regard, the study thus recommends that the conduct of monetary policy in Tanzania should aim at influencing individuals' inflationary expectation formation process in the direction which may be useful for the effectiveness of the policy to be realized. Thus, it is recommended that a package of monetary policy which strive to ensuring financial market liberalization, avoidance of selective credit policies and the use of interest rate in containing the inflation should be adopted. Furthermore it is suggested that institutional framework for supervising and regulating financial market by monetary authority should be instituted.
Moreover, there is a need for ensuring that the conduct of monetary and other policies creates and allows efficient allocation of resources using price mechanism. To realize this monetary authority should strive to ensure price stability. This will have a far reaching impact desire to hold real money demand and consequently, the conduct of monetary policy shall be enhanced.
Furthermore, when such an emphasis on monetary policy formulation is made, there is however a need for monetary policy to be accompanied by a package of other policy measures such as exchange rate and fiscal policies, so that these policies supplement each other in their course of realizing the intended policy targets.
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Available in print form
Keywords
Monetary policy, Money, Supply, Tanzania, Economic conditions, 1945-1990
Citation
Kihaule, A.M (1994) Behaviour of demand for money function: a case study of Tanzania 1967-1990,Masters dissertation, University of Dar es Salaam. Available at (http://41.86.178.3/internetserver3.1.2/detail.aspx?parentpriref= )