The stability of demand for money in the proposed Southern African Monetary Union

Abstract

PurposeThe purpose of this paper is to investigate the stability of demand for money in the proposed Southern African Monetary Union (SAMU).Design/methodology/approachThe study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community. A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling.FindingsThe findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU.Originality/valueThis study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.