DETERMINANTS OF DEMAND FOR MONEY AND ITS STABILITY IN NIGERIA (1991-2014)
This study examines the determinants of the broad money demand and its stability in Nigeria over the quarterly period 1991:Q1 to 2014:Q4. Most studies on the determinants and stability of the money demand function have been focused on the advanced economies. Only a few empirical studies are focused on the demand for money in Nigeria, differing by time period, monetary aggregate, data frequency and model specification. The specific objectives were to: (i) evaluate how income, interest rate, inflation rate, exchange rate and foreign interest rate affect the quantity of money demand in Nigeria, (ii) examine the money demand function and to understand its long-run cointegrating relationship with the selected macroeconomic variables and (iii) study the short-run dynamics of the money demand function in Nigeria so as to incorporate both short-term deviations and long-run expectations. The research utilizes secondary data sourced from the Central Bank of Nigeria’s statistical bulletin and the International Monetary Fund’s world economic outlook database and employs the ordinary least square regression technique, the autoregressive distributed lag modeling to cointegration and the error correction model in order to ascertain whether monetary targeting is still relevant in setting monetary policy framework in Nigeria. The findings of the study reveal that real income, domestic interest rate, inflation rate, exchange rate and foreign interest rate have a predictable impact on the quantity of money demand in Nigeria. Real income and exchange rate are positively related to the real broad money balances while domestic interest rate, inflation rate and foreign interest rate are inversely related to the demand for broad money. Also, the results indicate that a long-run relationship exists between the real broad money aggregate and its determinants. Furthermore, both the CUSUM and CUSUMSQ tests confirm that the short-run and long-run parameters of the real money demand function are robust and exhibit parameter constancy. The remarkable stability of the money demand function provides validity for the monetary authorities to target the broad money supply in its effort to achieve price and financial system stability in Nigeria.
Keywords: Broad money demand, autoregressive distributed lag, monetary policy, stability.