The demand for money in socialist Tanzania

Abstract

In advanced countries, monetary policy most often is employed in attempting to modify shortrun business cycle fluctuations, although longrun price stability is likewise an important objective. Less developed countries, understandably, place greater policy emphasis on long-run economic growth. For these countries, money expansion is frequently a major source of government revenue. Public demand for this newly created money, in turn, has important implications for critical macroeconomic variables such as incomes, prices, and interest rates. As a consequence, money demand plays a central role in the success or failure of development policies. Nevertheless, until recently, there was very little research on money demand in less developed countries. 1 Two early works were by Adekunle [1968] and Wong [1979], 2 Adekunle compared money demand functions for groups of countries which differed by their levels of development. Wong's study focused on the importance of including measures of credit restraint in money demand functions for developing countries. None of these studies contained data for African countries, many which did not receive political independence until the 1960's. Thus, very little is known about the monetary proclivities of people living on this continent. That gap in the literature was partially filled with the recent publication of three papers on money demand in Africa: Darrat [1985] on Kenya; Arize and Lott [1985] on Nigeria; and Domowitz and Elbadawi [1987] on the Sudan. This paper presents results of the study of money demand in Tanzania, an East African nation which obtained its independence in 196 l. To better understand the generality of its appli-