This study computes Divisia monetary aggregates DM1, DM2, and DM3 for Nigeria using the Tornqvist-Theil quantity index for the period 2007M12 to 2020M12 and evaluates the performance of the higher-order aggregate (DM3) with a corresponding higher aggregate of the simple sum broad money supply (M3). Applying the indicators to money demand function the results showed that DM3 performed better than the matching simple sum measure M3 due to its faster convergence rate. This is because the Divisia aggregates contain additional information in the form of user-costs and spending shares that are not considered in the compilation of the traditional measure, information that may be important for the proper execution of monetary policy. It is therefore, recommended that the Divisia broad money index be used as complement to the simple sum broad money supply for policy decisions.
The growing concern amongst analysts, economists, and policy makers on the interrelationship between the soundness of the financial system and the macro-economy is gradually being confirmed by both theoretical and empirical studies. This study is an attempt to join the strand of literature that investigates the link between the soundness of the banking sector and macroeconomic performance using Nigeria’s quarterly data from 2007Q1 to 2018Q4. The study applied autoregressive distributed lag approach and found among others that FSIs are strongly related to macroeconomic variables, hence capable of pre-empting financial crisis in Nigeria. The study, therefore, recommends that movements in macroeconomic variables should be used by the Central Bank of Nigeria to take proactive supervisory policy measures to avert a systemic crisis in the banking sector.
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