Modeling the demand for money at a micro level: A case of Uganda

Abstract

A stable demand for money function is essential for the conduct of effective monetary policy. And its estimation is crucial for policy because it has a direct role in the trading activity of the market economy hence an effect on the general price levels. This study estimates the money demand function and its stability at a micro level using a regression analysis technique. The study applies a narrow definition of measuring monetary aggregate, M1 and uses a simple sum and Divisia approaches to estimate it. Empirical results show that in both approaches, income is a significant determinant of money demand while, interest rate is not. Both approaches yield an instable money demand function and are therefore not appropriate monetary instruments on their own. Hence, monetary policy needs to be used in conjunction with other policies to achieve the goal of economic stabilization and adjustment.