Money demand and stabilisation in Zimbabwe

During the 1980s the potential instability of Zimbabwe's unsustainably high budget deficit was reduced by the smooth transfer of resources from the private to the public sector via the domestic financial system, which affected private demand for financial assets. Import, exchange and price controls operated to suppress private-sector demand. This led to the build-up of private savings, which was on-lent to the government via liquid asset requirements and the crowding out of domestic deposits in the nonbank private sector's portfolio by government securities. This article uses Johansen's procedure for analysing cointegration to model the demand for real money balances in Zimbabwe, in order to determine the extent to which these constraints on the domestic asset market suppressed the demand for money in Zimbabwe.