Modelling the Demand for Money Function in Nigeria: Is There Stability?

Authors

  • Bassey Nsikan Edet Akwa Ibom State University, Ikot Akpaden, Mkpat Enin, Akwa Ibom State, Nigeria Author
  • Solomon Ubong Udo Hutton School of Business, University of the Cumberlands, Williamsburg, Kentucky, United States Author
  • Okon Ubokudom Etim Akwa Ibom State University, Ikot Akpaden, Mkpat Enin, Akwa Ibom State, Nigeria Author

Keywords:

Liquidity preference, demand and money

Abstract

This study adopts the Keyne’s Liquidity Preference and Friedman Restated Hypothetical approaches to formulate

 

appropriate demand for money models in Nigeria. Data sourced from the Central Bank of Nigeria for the period

 

1986-2013 were analyzed using the Augmented Dickey Fuller (ADF) and Phillips-Peron (PP) tests for unit root,

 

Engle-Granger (1987) Co-integration and error correction modeling technique as well as the Chow test of stability.

 

The unit root test result revealed that only real income, real interest rate, Treasury bill rate and inflation rate were

 

stationary at levels while others were stationary at first difference. Result further revealed that while income (Y)

 

enhances the desire to hold money, interest rate (RT) and expected inflation rate (EXINF) impacted negatively on

 

money demand indicating that during inflationary expectation and periods of lower interest rates, asset holders

 

switch out of money assets into real assets. Hence, inflationary expectation and interest rate were vital determinants

 

of asset substitution in Nigeria. Surprisingly, real interest rate and inflation rate fail to significantly explain the

 

variation in demand for money in Nigeria for the study period. Result of the Friedman restated hypothetical model

 

showed that increase in return to other money assets such as Savings deposit, Equity and Treasury bill reduces

 

economic agent’s desire to hold money. The stability test result further revealed that money demand was stable in

 

Nigeria for the sampled period. Accordingly, to enhance money demand, policies that would increase real money

 

income, reduce money banks interest rate and returns on other money bank securities, as well as inflation rate while

 

ensuring macroeconomic stability should be pursued. The study further makes case for the use of interest rate as a

 

tool for monetary stability at the expense of real rate of interest.

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Published

2017-03-27

Issue

Section

Articles

How to Cite

Edet, B. N. ., Udo, S. U. ., & Etim, O. U. . (2017). Modelling the Demand for Money Function in Nigeria: Is There Stability?. Bulletin of Business and Economics (BBE), 6(1), 45-57. https://bbejournal.com/index.php/BBE/article/view/182

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