Money Demand in Nigeria: Application of Autoregressive Distributed Lag Approach

Abstract

Monetary authorities have shown an increasing appetite for a steady demand for money function in Nigeria because of its vital role in conducting effective monetary policy. This paper presents a clear position of the money demand function deemed important for monetary policy implementation, especially with regard to a monetary targeting framework. The paper aimed to estimate a broad money demand function using quarterly data from Q11981 to Q4 2018. The autoregressive distributed lag/bounds test model was utilized for the cointegration test. The characteristics of the time series for the study were determined with the aid of the augmented Dickey–Fuller (ADF) and Phillips–Perron tests. The empirical results show the existence of cointegration among broad money demand, income, interest rate (I), real exchange rate (REXR) and inflation rate (INFL) within the considered period. Consequently, an error correction model (ECM) was set up to explain the short-run dynamics and we observed that the short-run adjustment for disequilibrium correction was insignificant. From the empirical findings, it was noticed that the velocity of money in the economy is predictable and, as such, a money supply target could be employed to regulate income and price levels.