2 Financial Liberalization and Money Demand in Mauritius Abstract The Bank of Mauritius is considering moving to a formal inflation-targeting framework, which will require, among other things, a better understanding of the monetary policy transmission mechanism. This paper will contribute to this understanding by testing the stability of the money demand function for both M1 and M2 in Mauritius using annual data for the period 1967 to 2005. The Durbin h test and Chow test for structural stability are employed to ascertain whether the current policy framework satisfies the necessary condition for effectiveness. The results demonstrate a stable money demand function
