An Econometric Analysis of the Demand for money in Zambia 1965-1984

Abstract

The past several decades have witnessed considerable empirical research on the demand for money function due to the vital role this function plays in macroeconomic analysis especially in regard to the formation and transmission of monetary policy. Consequently demand for money functions have been empirically estimated by many researchers for a number of developed and developing countries. For example Baumol (1952), Teigen (1964),Adekunle (1968), Bhattacharya (1974) and Darrat (1985).However, the demand for money function for Zambia has not been estimated before. It is the aim of this study,therefore, to estimate an appropriate demand for money function for Zambia using annual data over the period 1965 to 1984. One of the central issues that this study addresses is whether the Zambian demand for money relationship has shifted during the period of estimation. This is important because demand for money stability is a prerequisite for an effective monetary policy. As Darrat(1985) pointed out, to predict adequately the impact of money supply changes upon real output, interest rates, and prices the underlying demand for money relationship must be temporarily stable.cont/,The paper is organised as follows: Chapter I is a brief review of the Zambian Economy. While Chapter II is an overview of the literature on demand for money it also lays down the theoretical foundation of our study . In Chapter III we discuss the determinants of the aggregate demand for money in Zambia. Also included in this Chapter is the specification of an appropriate demand for money function for Zambia, the empirical results and the examination of the stability property of the demand for money function. The principal conclusions of this study are as follows:- 1. The appropriate empirical definition for money in Zambia is the M2; 2. The explanatory variables that significantly influence real demand for money in Zambia are real GDP (excluding subsistence agriculture) and real treasury bill rate; 3. Elasticity of real demand for money with respect to real GDP is greater than unity because of the upward bias induced by monetization; and 4. There is evidence that the estimated demand for money function is structurally unstable over time