Stability of the Nigerian Money Demand Function (1970-2016)

Abstract

This study examines the stability of the Nigerian money demand function, from 1970-2016. Emphasis is to examine the stability of broad money (M2) demand function in Nigeria with the Presence operations of E-money economy and to ascertain the presence of structural changes and its breaks in broad money (M2) demand function in Nigeria economy. Based on application of advanced econometric techniques (Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests, Ordinary Least Square (OLS) Technique, Chow Test, and Stability Test & Co-integration Test) conducted, it was observed that there existed long-run relationship between real money demand function and the independent variables. Our results indicated the presence of structural change and break effect which was around 1981 and 2005 during the period of the study. Furthermore only the CUSUM of stability test confirms the stability of short-run parameters of real money demand function, while CUSUMSQ was found to be unstable. These empirical results do not support stability of the Nigerian money demand function with the Presence operations of E-money economy in Nigeria during period under review. Based on these findings, the researcher hereby recommends that, The CBN should deviate from M₂ as an intermediate target for monetary policy and make use of effective interest rate on credit for money transmission mechanism channels. Since for developing country like Nigeria need a tolerable interest rate i.e. an interest rate (neither higher and nor low) that will allowed the economic activities to be operational. Finally a sustainable security control on e-money uses in Nigerian banking system should be put in place. This will enable CBN to have control over the monetary linkages from e-money uses and aggregate money supply along with socio/political environment and corruption free in the economy.