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School of Accounting, Economics and Finance

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Browsing School of Accounting, Economics and Finance by Author "Adelit, Nsabimana."

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    Effectiveness of monetary policy and money demand stability in Rwanda : a cointegration analysis.
    (2010) Adelit, Nsabimana.; Simson, Richard Andrew.
    In 2007, the government of Rwanda launched a medium-term programme of four years, as stated in its Economic Development and Poverty Reduction Strategy (EDPRS). A part of this programme is a prudent monetary policy which is one of the responsibilities of the National Bank of Rwanda (NBR), especially via its role of controlling liquidity in the national economy for ensuring macroeconomic stability. The National Bank of Rwanda adjusts base money to ensure that the level of the monetary aggregate M2 is consistent with price stability. To effectively implement this monetary policy, two conditions are necessarily required: (i) a stable demand function for money; (ii) a stable long-run relationship between the money stock and the price level. Using a cointegration analysis we investigated the effectiveness of this policy through examining whether these two conditions are fulfilled for the years 1996:Q1 to 2008:Q3. This study confirmed the stability of the money demand function and found that the money stock in the Rwandan economy and prices trend together in the long-run. Thus, targeting the monetary aggregate M2 is a good indicator of the price level. Moreover, we found that at a five point six per cent (5.6%) significance level, the Rwandan money market needs 3.5 quarters to eliminate a half disequilibrium discrepancy in the money demand model. At a six point five per cent (6.5%) significance level, the Rwandan money market needs 4.5 quarters to eliminate a half disequilibrium discrepancy in the money supply model. Monetary policy implemented by the National Bank of Rwanda remains effective as it is still possible to achieve the overall objective of price stability through targeting the monetary aggregate M2.