Stability of Money Demand in Sub-Saharan Africa: A Cross-Sectional ARDL Analysis by Income Levels

Abstract This study investigates money demand stability in sub-Saharan African (SSA) countries, utilizing a quarterly dataset spanning a 24 year-period from 1999 to 2023 sourced from the World Bank Indicators and International Monetary Fund. The study disaggregates SSA countries into three income groups, upper-middle, lower-middle, and low-income, to evaluate the magnitude of stability of money demand, both at the panel level and within each income group. This approach provided nuanced insights and robust policy recommendations. The short- and long-term effects of key predictors on real monetary aggregates were assessed by employing cash-in-advance theory and the cross-sectional augmented autoregressive distributed lag (ARDL) model. The findings reveal that real exchange rates, foreign interest rates, and real GDP significantly influence money demand at the panel level, whereas the inflation rate exerts a contractionary effect. At the income group level, the findings reveal that money demand is stable in upper-middle- and low-income SSA countries, whereas lower-middle-income countries display variability, indicating a divergence in levels of economic resilience across income categories. The study’s findings highlight several policy implications and recommendations, as such the study advocates for the adoption of a unified monetary policies framework and a single currency policy, to enhance stability, foster growth, and reduce systemic asymmetries within the region. Additionally, the implementation of inflation-targeting policies is recommended to further consolidate economic stability and promote sustainable development across SSA countries.