10.1.1.198.5110

10.1.1.198.5110 - Evidence on the Demand for Money Function...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Evidence on the Demand for Money Function in Uganda * George Kararach Policy Analyst Unicef Harare Abstract The paper provides an empirical analysis of the demand for money function in Uganda. It argues that monetary policy: based on monetarist views of the dynamics of a less developed economy is, to say the least, ineffective in regulating the economy. An error correction model is used to examine the character of the demand for money – in particular if it is stable in order for traditional monetary policy to be effective. The evidence on Uganda suggests that the demand for money function is unstable and hence, monetary policy needs to be used in conjunction with other policies to achieve the goal of economic stabilisation and adjustment. JEL Classification : E41, O23 Key Words: Monetary policy, new monetarism, error correction models, cointegration, financial disintermediation, endogenous money, money demand, money supply, Granger causality, fiscal policy, inflationary process, Structural Adjustment Programme.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Evidence on the Demand for Money Function in Uganda * . Introduction This paper attempts to provide an empirical analysis of the character of the demand for money function in Uganda and so examines whether there has been any substitution between various financial assets as the conduct of monetary policy changed especially in view of the fact that the monetary sector in Uganda has undergone considerable financial deregulation as part of the IMF imposed structural adjustment programme (SAP). It is hoped that financial deepening would occur and a favourable environment for monetary policy. Financial liberalisation affects the demand for money function in the following respects: a) interest rate becomes a significant variable in the demand for money function. Financial liberalisation may result in a too high real rate of interest. This rise in interest rate results from the behaviour of oligopolistic banks as deregulation relaxes banking practices and the banks take undue lending risks (see Veneroso, 1986), b) reform measures are likely to enhance financial market development thus creating a range of attractive financial assets or near-monies and under a flexible exchange rate system expose the economy to international fluctuations - reform would cause a shift in the constant term of the demand for money function, c) the relationship between money, income, interest rates, exchange rates, etc. may all alter after liberalisation of bank credits, interest rates and exchange rates causing a shift from direct to indirect monetary instruments (see Jonson and Rankin, 1986; Tseng and Corker, 1991), d) increased competition amongst financial institutions may lower (but may also increase) financial transaction costs and moral hazards (Conteh, 1996); thereby causing the demand for money to respond differently than previously to its explanatory variables.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/13/2012 for the course ECON 101 taught by Professor Malrani during the Spring '05 term at Bunker Hill.

Page1 / 16

10.1.1.198.5110 - Evidence on the Demand for Money Function...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online