The purpose of this paper is to determine whether there exists a stationary long-run equilibrium relationship between real money balances, real income and opportunity cost variables in Tanzania which can be identified as a real money demand function. Cointegration and error correction techniques are employed to model the demand for money over the period 1974-1996. The paper examines the impact of the economic reform programme, launched in the mid-1980s, on money demand, first giving a macroeconomic overview of Tanzania’s economy, in particular its fiscal policy and money supply and exchange rate policy, followed by a specification of the money demand model and a discussion of the estimation methodology and the available data, along with their time series characteristics. Empirical results are given of testing for cointegrating relationships between real money balances, real income, inflation and expected depreciation. The paper finds a stable long-run equilibrium demand function. The demand for money has remained relatively predictable throughout the process of reform. Evidence suggests that the implementation of the Banking and Financial Institution Act of 1991 is having an impact on monetary policy as money supply has started responding to interest rates. App., bibliogr., notes, sum.
