Impact of Monetary Uncertainty and Economic Uncertainty on Money Demand in Africa

Abstract

This dissertation investigates the role that economic uncertainties and monetary uncertainties play in the money demand function for 21 African countries. The Auto-regressive Distributive Lag (ARDL) and F-test approach are employed using quarterly time series data covering the period from 1971I-2012IV. In particular, this paper aims to demonstrate both short and long-run relationships between the dependent variables, Real Money Aggregate (M2), and the independent variables that include real income (Y), inflation rate nominal effective exchange rate (NEX), output uncertainty (VY), and monetary uncertainty (VM). We apply GARCH methodology to approximate the uncertainty measures. The empirical results show that except for Egypt, monetary VM and VY have significant short-run as well as long-run effects on money demand in all the countries, with some variables carrying negative or positive coefficient. We find that the coefficients of Y in all the countries is positive while that of and NEX are negative, implying depreciation of domestic currency decreases demand for money. The results also indicate that CUSUM and CUSUMSQ test are stable, thus M2 is stable in all the countries except Egypt