A Macro Economic Analysis of the Demand for Money in Nigeria

The demand for money plays a very essential role in macroeconomic analysis. This paper expresses a mathematical relationship between the quantity of money demanded and its various determinants which are; interest rate, income, price level, credit availability, frequency of payments, etc The analysis was done using the Vector Autoregressive method. The ADF and KPSS unit root tests were conducted. The co-integration test was established using the Johansen co-integration test. The study shows how the demand for money responds to shock in itself, shock in interest rate, shock in credit to private sector, shock in credit to government, and shock in domestic assets. The study also discovered that money demand has a major effect on the aggregate demand which accounts for the Gross Domestic Product (GDP) of the economy. This explains that by ensuring efficiency in demand for money, aggregate demand would be achieved and adequate sustained growth also will be achieved within the economy. Keywords: Interest Rate, Gross Domestic Product (GDP), Income, Aggregate Demand and Price. DOI: 10.7176/JESD/11-6-05 Publication date: March 31 st 2020

selective credit controls ,administered interest and exchange rates, also because the prescription of money reserve requirements and special deposits. According to Al-Samara (2011), the money demand function is considered as a key factor in conducting reliable strategy of monetary policy and selecting the suitable nominal anchor that monetary makers use to tie down the price level. The marvelous step in monetary analysis showed why a nominal anchor, such as the inflation rate, exchange rate, or the money supply is such a crucial element in achieving the price stability.

Empirical Literature Review
The empirical literature on the demand for money in Nigeria is quite vast. A number of studies have examined the stability of money demand function in the context of cointegration analysis. Bahamani-Oskooee and Bohl (2000) analyzed the steadiness of M3 money demand function for Germany following the monetary unification. Their results indicated that M3 money demand function in Germany isn't stable. Bahamani-Oskooee and Barry (2000) investigated the steadiness of the M2 money demand function in Russia. They found evidence of cointegration between the series in the system, while the plot of the cumulative sum of recursive residuals (CUSUM) provided evidence of stability, the plot of the cumulative sum of squares of recursive residuals (CUSUMSQ), on the other hand revealed that M2 function is not stable. Nell (1999) empirically evaluated the existence of a stable end of the day demand for money function in South Africa over the period 1965 -1997, as  According to Ajayi (1977), "The demand for money is inelastic with respect to income and price changes expectation. Using the OLS model, he discovered that there is an unstable money demand, Real income and real interest rate in the aggregate M2.
Al-Samara (2011), in his study in the analysis of money demand function in Syria found that real money demand M2 and its economics determinants are weakly cointegrated. On the other hand, stability test and error correction model have provided a support that cash demand function is unstable within the Syrian economy, and this instability might be as a result of structural changes in the function. Anoruo (2002) explored the steadiness of the M2 money demand function in Nigeria within the SAP period and his results from the Johansen and Juselius (1990) cointegration test suggested that real discount rates, economic activity and real M2, are cointegrated. The results of the study showed that M2 is a viable monetary policy tool that could be used to stimulate economic activity in Nigeria. The earliest studies on the demand for money in Nigeria referred to as the TATOO debate essentially focused on definition of money, income as a key variable and a bit of stability issues (Yamden, 2011). Nwaobi (2002 has also made efforts to examine the stability of the Nigeria's money demand function and found it to be stable. He then suggested that monetary policy could be effective and that income is an appropriate determinant in the estimation of money demand in Nigeria. According to Mai-Lafia, (1995), there is an inverse relationship between the desire to hold money and desire to invest. Borrowers are in need of credit then they create money substitutes which have the effect of reducing the demand for money as a form of holding wealth. He used shares as an example and stated that if they are close substitutes, an increase in distributed dividends will induce a reduction in the demand for cash balances and this may successively favour investment of such excess in shares.

Methodology and Theoretical Framework
The theoretical framework adopted in this study is the Keynesian theory of demand for money, which is also called liquidity preference theory. According to liquidity preference theory, demand for money is determined by interest rate and income. In other words, there are three motives for holding money; Speculative motive, Precautionary motive, and Transactionary motive. Both precautionary and trasactionary motives are functions of income while speculative motive is a function of interest rate. D m = f (r, Y)

Model Specification
From the liquidity preference model, the model used from this study is specified. This was done by taking the log of both sides, and adding other control variables. The model is specified below: LDEMANDt= δ + βLGOVTt + YLASSETt +α PRIVATEt +πINTt +µt Where LDEMAND is the log of demand for money, LGOVT is the log of government domestic borrowing, LASSET is the log of domestic assets, LPRIVATE is the log of credit to the private sector, INT is the interest rate. The data used is monthly data from 2010 to 2016. All the data were sourced from CBN statistical bulletin.
Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.11, No.6, 2020 Analytical Method The analysis was done using the Vector Autoregressive method. The unit root test was used using the ADF and KPSS unit root tests. The co-integration test was established using the Johansen co-integration test.

RESULTS PRESENTATION
The first thing in this analysis is to examine the unit root properties of each variable. This is vital so as to determine the direction of the analysis. This was done using the ADF and KPSS unit root tests.

Unit Root Test 1.1 ADF testing for the Unit Root of the Variables at level
The establishment of the presence or absence of unit root in each variable was firstly done by the use of ADF unit root test at the level form for each variable. The result. Shown in Table 1, shows that the probability values of the t-statistics are not significant in for each variable, especially at 1% and 5% levels. Similarly, the absolute values of the t-statistics are lower than the absolute values of the critical values of the variables. This shows that each of the variables suffers from unit root problem in their level form.

ADF Testing for the Unit Root of the Variables After first Differencing
The establishment of the presence or absence of unit root in each variable was then done by the testing for ADF unit root test at the first differencing form of each variable. The result, shown in Table 2, shows that the probability values of the t-statistics are significant at 1% for each variable. Similarly, the absolute values of the t-statistics is higher than the absolute values of the critical values of the variables. This shows that each of the variables does not suffer from unit root problem in their first-differencing form. Unit Root is Absent ** indicates significant at 5%, * indicates significant at 1%,

KPSS Unit Root Test Results At Level
A further test in the establishment of the presence or absence of unit root test was done using KPSS unit root test. Unlike the case of the ADF unit root test, the significance of the null hypothesis in the case means that there is no unit root. From the Table 3, the values of the adjusted statistics is higher than the critical values, indicating the rejection of the null hypothesis, and accepting the conclusion that the variables contain unit root, Table4

Testing Relationship in the Long Run
Given the findings of the unit root test, it is vital to examine the possibility of a long run relationship among the variables in the model. It is imperative to select a lag length that is optimal for the Johansen co-integration test. Table 5 shows the optimal length of the lag should be one. This was used for the analysis.

Johansen Co-integration Test
As shown in Table 6, the Trace and Maximum Eigen value of the Johansen Co-integration test reveals the presence of no co-integration equations in the long run. This means that the variables do not have long run relationship. Given the results of the no co-integrating relation, the need to estimate unrestricted vector autoregressive (VAR) is necessitated Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.11, No.6, 2020

Unrestricted Vector Autoregressive (VAR) Result
One important way to interpret the VAR result is through the impulse response function. The unrestricted VAR also helps to examine the response of the dependent variables to changes in the independent variables in the model. This is presented in this section. The impulse response function helps to interpret the results of the VAR model. It shows how demand for money responds to shock in its self, shock in interest rate, shock in credit to private sector, shock in credit to government, and shock in domestic assets. As shown in Figure 1, all the independent variables are significant in determining the demand for money. The result shows that the response of demand for money was initially positive to credit to government until the third period, and then became negative. An explanation for this is that as government borrows more money from the economy to spend, inflation increases, making consumers willing to hold more money. However, with time, increased government spending leads to higher interest rate. This will ultimately decrease demand for money because consumers will want to benefit from higher interest rate, and reduce the amount held for idle use.
Similarly, the result is also similar with that of the credit to the private sector. The more credit access consumers have, the more money they have access to for idle usage. Similarly, the demand for money responds negatively to shock in domestic asset. Domestic asset is interest generated, and the more domestic assets are acquired by consumers, the less is demand for money. This shows that domestic assets have a negative effect on demand for money. The result is also similar with the effect of interest rate on demand for money. Demand for money responds negatively to shock in demand for money. In order words, an increase in interest rate will have a negative effect on demand for money. Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700(Paper) ISSN 2222-2855(Online) Vol.11, No.6, 2020 47 Figure 1: Impulse Response Function of Demand for Money

VAR Granger Causality Test Results
The Unrestricted VAR also indicates short run causality among the variables. This is presented in this section. The result shows that there is no causality between government borrowing and demand for money. However, there is a unidirectional causality from demand for money to credit to private sector. More so, there is a unidirectional causality running from demand for money to domestic assets. In other words, it is demand for money that granger causes demand for assets. There is however no causality found between interest rate and demand for money.

Conclusion and Recommendation 5.1 Conclusion
This study investigates the macro economic analysis of the demand for money. The Data for the period 2010 to 2016 was used. The time series characteristics of the model were examined using the ADF and KPSS unit root tests as well the Co-integration and VAR tests to determine whether a long run relationship exist between the variables of interest.
The results obtained were quite commendable in the sense that most of the variables conform to a priori expectation about their signs. The result under the ADF testing shows that the probability values of the t-statistics are significant at 1% for each variable signifying that each of the variables does not suffer from unit root problem in their first -difference. The significance of the null hypothesis in the KPSS Unit root test means that there is no unit root since the adjusted statistics is higher than the critical values, and this indicates a rejection of the null hypothesis and accepting the conclusion that the variables contain unit root. The Johansen co-integration test reveals that there are no co-integration equations in the long run. This explains that the variables do not have long run relationship. Looking at the VAR model, the demand for money responds to shock in itself, shock in interest rate, shock in credit to private sector, shock in credit to government, and shock in domestic assets. This explains that as government borrows more money from the economy to spend, inflation increases, making consumers Response of DLDEMAND to DLGOVT -.04 .00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10 Response of DLDEMAND to DLPRIVATE -.04 .00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10 Response of DLDEMAND to DLASSET -.04 .00 .04 .08 .12 1 2 3 4 5 6 7 8 9 10 Response of DLDEMAND to DINT Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.11, No.6, 2020 48 willing to hold more money.

Recommendations
The monetary authorities in Nigeria should introduce the proper monetary policy along side an improved fiscal discipline. This implies formulating policies towards redistributing income, financial development, exchange rate stability stable and growing stock market.
The Central Bank of Nigeria should put in place monetary policy that would ensure that the volume of money in circulation does not exceed the demand for money. This will create efficiency in the demand for and supply of money and thus lead to equilibrium in aggregate demand and aggregate output with sustainable economy growth on the economy as a whole.
The interest rate policies needs to be reformed towards market principles in order to improve the effectiveness of Monetary Policy as a result of Nigeria's increasing integration into the world economy.