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Monetary Policy Strategy in Rwanda

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par Serge Musana Mukunzi
University of Kwazulu Natal - Maitrise 2004
  

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MONETARY POLICY STRATEGY IN RWANDA

By

Serge Musana Mukunzi

Supervisor: Nicola Viegi

Submitted in partial fulfillment of the requirements for the Master's degree of commerce (Economics).

University of Kwazulu-Natal,

Durban, 2004

DECLARATION

I declare that this is my own work, except where acknowledged in the text, and has been submitted or a degree at any other university.

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TABLE OF CONTENTS

DECLARATION.....................................................................................i

TABLE OF CONTENTS...........................................................................ii

LISTE OF TABLES.................................................................................iv

LISTE OF FIGURES................................................................................v

DEDICATION.......................................................................................vi

AKNOWLEDGEMENTS.........................................................................vii

ABSTRACT........................................................................................viii

Chapter 1: INTRODUCTION..................................................................... 1

Chapter 2: THEORETHICAL FOUNDATION OF MONETARY POLICY...............5

2.1: Objective of monetary policy.................................................................5

2.2: The instruments of monetary policy.........................................................7

2.3: Monetary policy strategies....................................................... ............10

2.3.1: Choosing and using a target............................................................... 11

2.3.2: Monetary policy rules...................................................................... 12

2.3.2.1: Exchange rate rule........................................................................13

2.3.2.2: Money supply rule........................................................................14

2.3.2.3: Nominal GDP target rule.................................................................16

2.3.2.4: Inflation targeting rule....................................................................18

2.3.2.5: Taylor rule.................................................................................21

Chapter 3: MONETARY POLICY IN RWANDA.............................................23

3.1: Macroeconomic background.................................................................23

3.2: Monetary and exchange rate policy management.........................................25

3.2.1: Monetary policy.............................................................................26

3.2.2: Exchange rate policy........................................................................29

Chapter 4: ILLUSTRATION OF MONETARY STRATEGY

BY MEANS OF MODEL.........................................................................31

4.1: Empirical analysis.............................................................................34

4.1.1: Reaction function for Rwanda.............................................................34

4.1.2: Methodology..................................................................................36

4.1.2.1: Data...........................................................................................36

4.1.2.2 Time series properties of the data........................................................37

4.2: Estimation results..............................................................................40

Chapter5: CONCLUSION AND

SUGGESTION.........................................................................47

BIBLIOGRAPHY..................................................................................49

APPENDIX..........................................................................................54

LISTE OF TABLES

Table 3.1: Inflation objective and

Inflation observed in percentage...................................................................................27

Table 3.2 Monetary stock aggregate(M2) Net External Asset (NEA) and

Net Interior Asset (NIA)In percentage.........................................................29

Table 4.1 Unit root test-levels of variables................................................... 38

Table 4.2 Unit root tests of the first difference............................................... 38

Table 4.3 Ordinary Least squares

estimation of equation 4................................................ .........................40

Table 4.4 Ordinary Least squares

Estimation of equation 5.........................................................................42

LISTE OF FIGURES

Figure 3.1: Annual growth of monetary stock aggregate

M2 and inflation:1997-2002............................................................................28

DEDICATION

This dissertation is dedicated to the Musana family.

ACKNOWLEDGEMENT

My thanks goes to my academic supervisor Dr Nicola Viegi for his guidance, inspiration, comments and criticism which inspired many ideas and produced some very satisfying solutions.

I have profound gratitude to Professor Rwigamba Balinda, the Rector of Kigali Independent University, for sponsoring my post graduate studies at the University of Kwazulu-Natal.

Thanks goes to my friends and colleagues in the economic department for making my student life enjoyable.

Thanks also goes to my family and all friends for their encouragement and support which they have given me during my studies.

Last but not least, special thanks goes to my Lord Jesus Christ for all the Blessings, which, I enjoy in this life.

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