Economic Liberalization, Monetary Policy and Money Demand in Rwanda: 1980–2005
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Date
2010-01-28
Authors
Musoni J. Rutayisire
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
The objective of this study was to estimate a long and short run money demand function
in the Rwandan economy. Using the Johansen approach, this paper established that there
was a stable long-run equilibrium relationship between the demand for real money
balances, real income, the rate of return on foreign financial assets (Libor-London interbank offered rate) and the expected depreciation of the Rwandan franc (RWF). The
short-run dynamic model confirmed the stability of this relationship. These results suggest
that the monetary aggregate used in this study, M2, is the appropriate monetary target in
the Rwandan economy for monetary policy purposes and economic stabilization.
The significance of the return on foreign financial assets and of the expected
depreciation of the domestic currency demonstrated the importance of the external
determinants of money demand in Rwanda and confirmed the hypothesis of currency
substitution in the Rwandan economy.
Attempts to include various interest rates in the money demand function revealed
that these rates were not significant .This was not surprising because interest rates were
controlled for most of the sample period. Moreover, the excess liquidity in the banking
system in recent years made the interest rate ineffective as an instrument of monetary
policy.
Finally, another significant finding of this research is the speed of adjustment of the
demand for money, following deviation from its long-run equilibrium. As the short-run
dynamic model showed, this adjustment period amounts to about three years, which is
an indication of the persistence of monetary disequilibrium in the Rwandan economy.
Description
HG 1345. R88 2010
Keywords
Monetary Policy , Rwanda , Demand for money , Economic liberalization