Investigating the stability of money demand in Namibia
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Date
2009
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Studies on the stability of money demand or money supply functions have received prominent attention in the literature. This is due to the importance of having stable money demand or money supply functions for economic predictions to ensure long-term economic stability. Although these functions are not the only tools for monetary policy formulation, they play an important role in the assessment of the effectiveness of monetary policy in an economy. Stability in money supply or money demand is also important to ensure price stability, as one of the key areas that central banks like the Bank of Namibia (BoN) seeks to achieve. The BoN uses exchange rate targeting to achieve economic stability. It is for this reason that exchange rate is used as the key determinant of money demand in this study
The study employs various econometric tests to investigate the stability of money demand. The objective of the current study is to investigate whether money supply in Namibia is stable using two measures of money demand as adopted by the BoN. These measures are, M1, which refers to the total currency in the hands of the public, and M2, which includes currency plus bank deposits. The regression results show that both M1 and M2 have stable long-run relationships between income, interest rate, CPI and exchange rate. The R2 is 0.95 for M1 and 0.93 for M2 indicating that explanatory variables explain over 90 of changes in money demand. However, M2 is relatively more stable than M1 as indicated by the CUSUM and CUSUMQ tests. The CUSUM and CUSUMQ tests further indicate that there has not been a structural break in the Namibian economy during the year 1993 to 2006. Among the different factors affecting moneydemand, exchange rate, CPI, and interest rate were found to be significant determinants of money demand
Studies on the stability of money demand or money supply functions have received prominent attention in the literature. This is due to the importance of having stable money demand or money supply functions for economic predictions to ensure long-term economic stability. Although these functions are not the only tools for monetary policy formulation, they play an important role in the assessment of the effectiveness of monetary policy in an economy. Stability in money supply or money demand is also important to ensure price stability, as one of the key areas that central banks like the Bank of Namibia (BoN) seeks to achieve. The BoN uses exchange rate targeting to achieve economic stability. It is for this reason that exchange rate is used as the key determinant of money demand in this study
The study employs various econometric tests to investigate the stability of money demand. The objective of the current study is to investigate whether money supply in Namibia is stable using two measures of money demand as adopted by the BoN. These measures are, M1, which refers to the total currency in the hands of the public, and M2, which includes currency plus bank deposits. The regression results show that both M1 and M2 have stable long-run relationships between income, interest rate, CPI and exchange rate. The R2 is 0.95 for M1 and 0.93 for M2 indicating that explanatory variables explain over 90 of changes in money demand. However, M2 is relatively more stable than M1 as indicated by the CUSUM and CUSUMQ tests. The CUSUM and CUSUMQ tests further indicate that there has not been a structural break in the Namibian economy during the year 1993 to 2006. Among the different factors affecting moneydemand, exchange rate, CPI, and interest rate were found to be significant determinants of money demand
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Keywords
Money, Demand for money, Monetary policy