Empirical Analysis of Money Demand Stability in Nigeria

Abstract

The main focus of this study is to identify the variables influencing the demand for money in Nigeria; and to ascertain the stability of money demand in Nigeria. Related theories and empirical researches in this area were reviewed in order to ensure the relevance of variables under study and possible expectation of their relationship with money - demand in Nigeria. Four explanatory variables were specified for this study based on theoretical underpinning. Stationarity test were conducted and all variables were stationary at first difference, with two cointegrating equations after using the Johansen Cointegration test. The error correction model (ECM) was rightly signed and revealed a recovery rate of 18 percent. It was also recommended among others that the monetary policy strategy of the CBN should be structured to deal with the growing challenges posed by financial innovations. The stability test revealed that M2 money demand in Nigeria is stable using both CUSUM and CUSUMSQ at 5 percent critical lines.

Keywords: Money-Demand, Non-Bank Financial Institutions, Speculative demand for money, Liquidity, cointegration.