Stability of Demand for Money Function in Nigeria


This study examines the long-run demand for real broad money function and its stability in Nigeria for the period 1986 to 2011. The study employs Ordinary Least Squares, Augmented-Dickey Fuller and Phillips-Perron tests for unit root, Engle-Granger approach for cointegration, CUSUM and CUSUMSQ tests for stability. The results of the stability and cointegration tests confirm that a stable, long-run relationship exists between demand for real broad money aggregate and its determinants: income, domestic real interest rate, expected rate of inflation, expected foreign exchange depreciation, and foreign interest rate. Furthermore, the results show that the income elasticity and foreign interest rate coefficients are positive while the domestic real interest rate, inflation rate, and exchange rate depreciation coefficients are negative, respectively. Hence, the apex bank in Nigeria can target the broad money (M2) aggregate to achieve macroeconomic objectives

Keywords: Cointegration, Real money demand function, Stability

Unique Article ID: IJDES-131

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