Money Demand Function in Nigeria: Stability and Structural Breaks

Abstract

This paper examined money demand function and its stability in Nigeria from 1970 to 2016. The study employed Robust Least Squares (RLS) regression method for the estimation of money demand function, while CUSUM and CUSUMSQ were used to examine the stability of money demand function. Multiple Breakpoints test approach was adopted to investigate structural breakpoints. The study found real income, interest rate, inflation rate, foreign interest rate as key determinants of money demand in Nigeria during the period covered by the study. Stability test revealed unstable money demand function and evidence of structural breaks in 1986, 1987, 1995, 1999, 2002, 2005, 2007 and 2008. This paper inferred that Central Bank of Nigeria should target broad money aggregates to control inflation in Nigeria. Also, in order to stabilize money demand in the country, the CBN should conduct monetary policy regime that focuses on stabilizing the real macroeconomic environment.

Keywords: money demand function, stability, structural breaks, Robust Least Squares, Nigeria