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

Bassey Nsikan Edet, Solomon Ubong Udo and Okon Ubokudom Etim
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Bassey Nsikan Edet: Akwa Ibom State University, Ikot Akpaden, Mkpat Enin, Akwa Ibom State, Nigeria
Solomon Ubong Udo: Hutton School of Business, University of the Cumberlands, Williamsburg
Okon Ubokudom Etim: Akwa Ibom State University, Ikot Akpaden, Mkpat Enin, Akwa Ibom State, Nigeria

Bulletin of Business and Economics (BBE), 2017, vol. 6, issue 1, 45-57

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.

Keywords: Liquidity preference; demand and money (search for similar items in EconPapers)
JEL-codes: E4 G33 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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