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2008 AEC - The Portfolio Behaviour of the Household Sector in African Economies

13-Sep-2008

We study the flow of funds and portfolio behaviour of the household sector in seven African economies over the period 1981-2004. We estimate a system of asset demand functions which are specified using the Almost Ideal Demand System (AIDS) framework. We acknowledge the distinctive features of each economy and thus estimate separately the financial assets for all seven economies using SUR estimation of a co-integrated model. We find the general model fits the data well for all the sample economies apart from Malawi, suggesting that a standard portfolio model, which highlights the distinctive features of each economy, can usefully be applied to study the portfolio behaviour in these economies. We also find that financial sector reforms have yet to produce noticeable financial deepening; specifically there is weak substitution and complimentarily effects among the assets with concentration on government bonds and bank loans, while there is no influence of the exchange rate on the demand for money.

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