The Demand for Money in Tanzania

We develop an econometric model of the demand for M2 in Tanzania, using quarterly data from 1998 to the present. The continuous decline in velocity since the late 1990s is associated with a transformation of economic activity that has cumulatively increased the monetary intensity of GDP. Portfolio behavior also responds to expected inflation and to exchange rate depreciation, with weaker effects from interest rates. The components of M2 respond to opportunity costs as expected, with currency more sensitive to expected inflation and deposits more sensitive to the interest rate on government securities. We discuss the policy implications of our results, including their relevance to the velocity-forecasting exercise that plays a key role in the Central Bank of Tanzania‟s policy framework.