Financial liberalization, inflation tax and the demand for money in Mozambique

Abstract

This paper uses an error correction mechanism to model the demand for currency in Mozambique. In addition, it derives the optimum inflation tax and tests whether it remained stable between 1991 to 1999. In line with other studies done elsewhere, currency is found to have a long run relationship with income and inflation. The long run income elasticity is one, while the inflation elasticity is 0.027, reflecting the importance of transaction demand and a greater scope for raising seignorage. Interestingly, despite political, financial and natural shocks, currency demand remained stable.

African Journal of Economic Policy Vol. 9(2) 2002: 1-20