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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Financial Liberalisation and Currency Demand in Zambia
Author:Adam, ChristopherISNI
Year:1999
Periodical:Journal of African Economies
Volume:8
Issue:3
Period:October
Pages:268-306
Language:English
Geographic term:Zambia
Subjects:monetary policy
money demand
Economics and Trade
External link:https://jae.oxfordjournals.org/content/8/3/268.full.pdf
Abstract:This paper examines how the demand for base money, i.e. the aggregate targeted by the authorities, has responded to financial liberalization measures implemented in Zambia in the early 1990s. Despite fiscal contraction, inflation has remained persistently high and volatile. One reason is the sequence of shocks which have undermined the demand for money. Two factors in particular have had a profound impact. The first was the monetary consequences of the fixed exchange rate regime pursued from 1987 to 1989. The second was the precipitate exchange rate and asset market reforms implemented between 1992 and 1994. Both events altered the nature of asset markets in Zambia and hence the demand for money. While liberalization induced a permanent portfolio adjustment away from domestic money, it also increased the conditional variance of the demand function, making currency demand less easy to forecast in the short and medium term and hence undermining the stabilization strategy. The paper provides a discussion of the background to the reforms of the 1990s, examines the implications of these reforms within a simple portfolio structure for asset demands, presents the empirical results of the estimation of this model using quarterly data from 1973 to 1998, and concludes with policy implications. A money-based approach to stabilization in Zambia may provide only an imperfect anchor for the price level while at the same time failing to protect the macroeconomy from the external volatility emanating from an accommodating nominal exchange rate policy. App., bibliogr., notes, ref., sum.
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