The Divisia monetary aggregates, demand for money stability, income, and inflation fluctuations in selected sub-Saharan Africa

The financial sector reforms adopted in the 4 selected Sub-Saharan Africa (SSA) countries, namely Kenya, Malawi, Nigeria, and South Africa have resulted to a remarkable change in the composition of monetary aggregates making the simple sum measure of money questionable. The reforms affect the stability of money demand function and create uncertainty in the macroeconomic environment leading to a slow growth and high inflation rates. This study constructs a new Divisia monetary aggregates for 4 selected SSA countries and investigate the role of monetary aggregates in the money demand stability, income and price fluctuations. Two variables; monetary uncertainty (MOU) and output uncertainty (OUU) were incorporated into the model. The study employed quarterly time series data covering 2000Q1 to 2015Q3. The ARDL and Toda Yamamoto causality methods were utilized in the analysis. The main objective of the study is to investigate the role of monetary aggregates in monetary policy decisions.
The results indicate that Divisia monetary aggregates perform well in explaining the stability of money demand functions. Both MOU and OUU are quite significant in the money demand stability. The study added to the existing literature on money demand by empirically exploring the impact of the MOU and OUU on money demand stability using an alternative monetary aggregate. The results also shows a significant two-way causality between money and income, however, money and prices signifying an endogeneity in money supply. The Divisia monetary aggregates perform relatively well in explaining income and prices fluctuations. The important policy implication of this finding is that monetary targeting could be more appropriate for the 4 selected SSA countries monetary policy decisions and therefore that monetary aggregates can be used to influence the growth in income and to minimize price fluctuations.