Money demand function for malawi- implications for monetary policy conduct

This paper analyzes the money demand function for Malawi during the period of 1985-2010 using monthly data. During the sample period, several structural changes occurred in the economy. Most of these changes were ignited by the structural adjustment programs that started in the late 1980s, then came the move to plural politics in the early 1990s. This was followed by structural reforms in the financial sector. In the very recent past, there has been an increase in real economic activity as measured by strong growth in real GDP in the years after 2002 and the financial innovations within the banking system after the year 2000. These factors do not seem to have affected the stability of the demand for money and hence increasing the probability of success for the conduct of monetary policy. Cointegration test results indicate a long-run relationship amongst real money balances, prices, income, exchange rate, Treasury bill rate and financial innovation. While all variables significantly influence money demand in the long-run, short-run policy must be directed at increasing financial innovation, open market activities and improving the productivity of the economy to provide higher return on alternative investments.