Determinants of Money Demand in Sierra Leone

Abstract

This study provides a comprehensive analysis of the determinants of money demand in Sierra Leone, focusing on macroeconomic factors such as income, interest rates, inflation, and exchange rates. Money demand is a crucial element in shaping monetary policy, influencing financial stability, and ensuring sustainable economic growth. The research integrates classical, Keynesian, and modern monetary theories to explore the multifaceted interactions that drive money demand in a developing economy like Sierra Leone. Utilizing secondary data spanning from 2010 to 2023, obtained from institutions such as the Bank of Sierra Leone, the World Bank, and the International Monetary Fund. The study employs  econometric techniques which include the money demand models, correlation analysis, and unit root tests for stationality. The findings indicate that real GDP has a significant positive impact on money demand, while inflation and exchange rate depreciation negatively influence money holdings. Interest rates exhibit an insignificant effect, highlighting the weak monetary policy transmission mechanism in Sierra Leone. These findings offer critical policy recommendations for the Bank of Sierra Leone and other financial institutions, aiding in the formulation of strategies that foster economic growth and financial stability. The research further emphasizes that a thorough understanding of the determinants of money demand in Sierra Leone is essential for effective monetary policy implementation, macroeconomic stability, and long-term economic development.The policy recommendations derived from this research are expected to aid in designing an efficient and robust monetary policy framework, contributing to economic stability and growth in the country.