The Stability of Money Demand in Rwanda and its Implication on Monetary Policy

The level and stability of the demand for money has received enormous academic attention because an understanding of its causes and consequences can usefully inform the setting of monetary policy. Over the last couple of years, the Rwanda economy has suffered major shocks such as foreign exchange pressures, huge import bills and domestic oil shortages that place extra pressure on prices to rise. As a result, some of these shocks suffered by the economy have contributed to the stability of prices being out of targeted range. The general objective of this study to analyze the stability of money demand in Rwanda and its iM2lication on monetary policy, over the time period 2000-2017. This study was used both descriptive and analytical research design. Ordinary Least Square (OLS) method will employ in analyze time series data captured over the period under study. Granger casualty test was used to test causality relationship between stability of money demand and its implication on monetary policy. The study was used secondary data analysis. The data is an annual time series data spanning from 2000 to 2017. The annual data was extrapolated into annual series. In order to understand very well and to expose the bi-direction between stability of money demand development and its implication on monetary policy, researcher decided to learn on statistical analysis for catching up the relationship between two variables. The econometric techniques used, such as statistical analysis, econometric graphs and the diagnostic test was Carried out to ensure that the data is reliable and is was not affect by such as serial correlation or heteresdostecity. Researcher was used different methods of overcoming the problem of spurious regression arising from using no-stationary time series. Augmented Dickey-Fuller (ADF) Unit root Test. The findings of the ECM, which incorporate the money demand and its implication on monetary policy, estimated through ECM testing approach. As such, real income (3.602411), interest rate (0.112121) and inflation (2.381232) are statistically significant relationship on monetary policy. It shows that money demand stimulates the economic activities and development process in the country to a greater extent, which is obvious from the higher positive value of its coefficient. The result shows that all independent variables have positive effect monetary policy. All coefficients of variables have positive sign. This shows that money demand has been contributed positively on the monetary policy from 2000-2017. R2 (0.022003) this show the goodness of fit the model. The co-integration test illustrates that the variables were co-integrated and implying that a long run relationships exists between money demand and monetary policy in Rwanda. Therefore researcher accepts H1#0 and fails to reject H0. In order to strengthen the financial sector, the Central Bank of Rwanda has to encourage the introduction of more financial instruments that are flexible enough to meet the risk preferences and sophistication of operators in the financial sector.