An Analysis of the Stability of Monetary Aggragates in Botswana

This paper seeks to investigate whether M1, M2 and M3 monetary aggregates in Botswana exhibit stability characteristics. Stability of the concerned aggregate implies it has a predictable path and therefore may be used by the authority in making policy decisions. This is achieved by employing stationarity tests and cointegration techniques to monthly data on these aggregates. The results indicate a stable relationship for M2 and M3 aggregates but not for M1, suggesting that M2 and M3 may be used as targets of monetary policy. Although formal tests of convergence on M2 and M3 were not employed, the fact that M3 is made up of Bank of Botswana Certificates among others.It seems reasonable to assume that M3 would be a better target than M2. A potential area for further research may be to assess whether using either of these monetary aggregates to anchor policy would actually work for Botswana, given also the existing trade ties and the exchange rate regime.