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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractA stable money demand function is essential when using monetary aggregate as a monetary policy. Thus, there is need to examine the stability of the money demand function in Nigeria after the deregulation of the financial sector. To achieve this, the study employed CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests after using autoregressive distributive lag bounds test to determine the existence of a long run relationship between monetary aggregate and its determinant. Results of the study show that a long-run relationship holds and that the demand for money is stable in Nigeria. In addition, the inflation rate is found to be a better proxy for an opportunity variable when compared to interest rate. The main implication of the study is that interest rate is ineffective as a monetary policy instrument in Nigeria.

The Stability of Demand for Money in the Proposed Southern African Monetary Union

“…As documented in Folarin and Asongu (2019), the theoretical settings for an investigation on the stability of the demand for money is in accordance with Hossain (1993, p. 91). Within the context of this paper, while real income is used as a scale variable, opportunity variables include: the inflation and interest rates.…”

The long run stability of money demand in the proposed West African monetary union

“…The study is based on annual data for the period 1981 to 2015 from thirteen of the fifteen Folarin and Asongu (2017). They include: the rate of inflation, foreign exchange rate, real effective exchange rate, real gross domestic product and real broad money.…”

“…A strand of the literature posits that if the demand for money is stable, mainstream monetary policy instruments can be employed to influence the supply of money (Poole, 1970). In essence, as documented in Folarin and Asongu (2017), this strand maintains that the interest rate is conducive as an effective monetary policy instrument if and only if the demand for money is characterised by significant stability.…”

“…Hence, the demand for money can be defined in terms of some unpredictability, essentially because changes in interest rates are exogenous to the demand function of money. It is principally on the grounds that the demand for money cannot easily be predicted that interest rates can be used as an instrument of monetary policy (Folarin & Asongu, 2017).…”

“…Third, as recently argued by Folarin and Asongu (2017), the extant contemporary empirical literature on the stability of money demand in developing countries is fundamentally motivated by the role financial innovation has played in enhancing the instability of money demand. Some recent literature that is consistent with this argument include: Ndirangu and Nyamongo (2015), Kumar (2011) and Nachega et al (2001) for Uganda, twenty developing countries and Kenya, respectively.…”