The role and determinants of money supply: the case for Zambia (1970-1998)

Abstract

This study is an attempt to evaluate the role and determinants of money supply in Zambia using the money multiplier approach over a period of 28 years (1970-1998). Various factors were analysed and from the results it is vividly clear that the constituents of money supply are diverse and unique in their own right Fiscal operations reflected in significant Bank of Zambia claims on government (BOZCG) which go to finance government expenditure (GEXP) were found to have a dominant influence on the money supply growth patterns in the economy. This empirical evidence is consistent with the commonly held view that there is a close link between fiscal operations and growth in money supply The overall impact of balance of payments (BOP) was found to be good for a build up of foreign reserves at the central bank and their total effect on money supply was rather insignificant. Past changes in Net Foreign Assets (NFAt-1) were also found to have some fairly significant dominance in explaining money supply patterns- a condition that suggests that the central bank does not completely sterilise the effects of external influence on the domestic economy. The cash (C/M1) and excess reserve (R/M1) ratios were found to be significantly influenced by changes in the real income (GDP). The study also brings to the fore the aspect that the exchange rate (XRTE) if left to its own devices as the case is now, could be a source of destabilisation to money supply .growth rate and hence needs to be watched closely. In this regard, it was felt that a managed float as opposed to a complete float would be ideal under the current scenario where most economic fundamentals such as GDP growth rate, export earnings, and the manufacturing sector are not performing well. It was further n.oted that since the central bank is not completely free from political influence, the bank should therefore intensify the usage of OMOs and discount rates as tools for mopping excess liquidity from the main arteries of the economy,