Money demand stability: A case study of Nigeria

Abstract

This paper presents an empirical investigation into the level and stability of money demand (M1) in Nigeria between 1960 and 2008. In addition to estimating the canonical specification, alternative specifications are presented that include additional variables to proxy for the cost of holding money. Results suggest that the canonical specification is well-determined, the money demand relationship went through a regime shift in 1986 which slightly improved the scale economies of money demand, and money demand is stable. These findings imply that Nigeria could effectively use the supply of money as an instrument of monetary policy.

Financial Liberalization and Long-Run Stability of Money Demand in Nigeria

“…This suggests that we can determined the long run impact of both scale and opportunity variables on both M1 and M2 in Nigeria. This is consistent with the study by Akinlo (2006) and Kumar et al (2013) that used M2 and M1 respectively. Pesaran et al (2001) with unrestricted intercept and unrestricted trend.…”

“…Lastly, using both M1 and M2, the demand for money is stable in Nigeria and it is not influenced by the measure of an opportunity variable. This findings supports existing studies which have utilized annual data, notably: Anoruo (2002) and Kumar et al (2013). Quarterly data spanning the period of 1992:Q1 to 2015:Q4 has been used in the study.…”

“…we follow existing studies such as Akinlo (2006), Kumar (2011), Khan and Hye (2013), and Kumar et al (2013) and then perform parameter consistency tests using CUSUM and CUSUM of square (CUSUMSQ) tests developed by Brown et al (1975 …”

“…The data point in the studies by Anoruo (2002) and Akinlo (2006) ends prior to the increase in bank capitalisation in 2005, a major reform within the financial sector in Nigeria. The study by Kumar et al (2013), which accounts for this increase in capitalisation only focuses on a narrow definition of money while the other two studies have used M2. In the light of these insights, it is difficult to directly compare the findings of the two underlying studies with those of Kumar et al (2013) because different monetary aggregate measurements are employed.…”

“…The study by Kumar et al (2013), which accounts for this increase in capitalisation only focuses on a narrow definition of money while the other two studies have used M2. In the light of these insights, it is difficult to directly compare the findings of the two underlying studies with those of Kumar et al (2013) because different monetary aggregate measurements are employed. This study therefore accounts for this weakness by: (i) using both M1 and M2 as measures of monetary aggregate and (ii) focusing on period after the liberalization of the financial sector in 1987 2 .…”