A Macro Economic Analysis of the Demand for Money in Nigeria

Abstract

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