Testing for the Stability of Money Demand Function in Nigeria

Abstract

This paper empirically examined the broad 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 real broad money demand becoming structurally unstable, and whether the stability of the money demand function supports the choice of M₂ as a viable instrument for policy implementation in Nigeria. The empirical results indicate that a long-run relationship exists between M₂ money aggregate and its determinants during this period, and that M₂ money demand in Nigeria is stable. The CUSUM and CUSUMQ test conducted confirm that the short and long run parameters of the real broad money demand function are robust, and exhibit remarkable stability. This finding validates the use of M₂ monetary aggregate as a nominal anchor for monetary policy implementation. It was therefore recommended that monetary authority should target M₂ monetary aggregate in regulating domestic prices and stimulating economic activity in Nigeria.

Keywords: Money Demand, Stability, ARDL Model, Bounds Test.