An Examination of the Stability of Narrow Money Demand Function in Nigeria

Imimole Benedict

Journal of Empirical Economics, 2014, vol. 3, issue 4, 252-260

Abstract: This paper has investigated the narrow money demand function and its stability in Nigeria for the period 1986Q1 to 2010Q4 using the Autoregressive Distributed Lag (ARDL) Bounds testing procedure. The aim is to ascertain whether the recent macroeconomic developments in the country from the inception of the Structural Adjustment Programme (SAP) in 1986, have resulted in the narrow money demand becoming structurally unstable, and whether the stability of the money demand function supports the choice of M1 as a viable instrument for policy implementation in Nigeria. The empirical results indicate that there is no long-run relationship between M1 money aggregate and its determinants; and that the ECM is not significant and does not have the required negative sign. However, the CUSUM and CUSUMQ test conducted confirm that the narrow money demand function is stable. This finding supports that M1 monetary aggregate can be used as a nominal anchor for monetary policy implementation in Nigeria. It was therefore recommended that M1 monetary aggregate should be targeted in regulating domestic prices in Nigeria.

Keywords: M1 Money Demand; Stability; ARDL Model; Bounds Test. (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:rss:jnljee:v3i4p7

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