The stability of broad money demand in three African countries: an empirical investigation for South Africa, Botswana and Nigeria.

Abstract

A stable money demand function plays a vital role in the analysis of macroeconomics, especially in the planning and implementation of monetary policy. With the use of cointegration and error correction mechanism, the present study investigates whether there exists a stable long run and short run equilibrium relationship between real money balances M2 and their explanatory variables in three African countries: South Africa, Botswana and Nigeria. The results indicate that there exists a long run equilibrium relationship between real money demand M2 and its determinants: real income, interest rate, inflation rate and exchange rate. Money demand functions in all countries are stable over the estimated time period, meaning that they can be an appropriate tool for determining a suitable target for monetary policy in each economy.