Money Supply and Asset Prices in Nigeria (2008-2013): An Empirical Review

Abstract

This paper examined the impact of Broad Money supply (M₂) on Asset prices in Nigeria. Monthly data, in logarithmic form, was used for the period 2008M1-2013M₁₂. The Eview7 Statistical Software was employed to conduct more robust tests in order to empirically analyze the data. The Unit root test show that the variables were stationary after being first differenced; at the 5% significance level. The Johansen Cointegration test gave evidence of one cointegrating equation which explains that a long-run equilibrium relationship exist between LogSMC and LogBMS. The Vector Error Correction Model was used to analyze short-run adjustment dynamics and showed -0.08% speed of adjustment of prior deviations from equilibrium. Thus, about 8% of disequilibrium is corrected monthly. The Granger Causality test demonstrate a Uni-directional causality from LogBMS→LogSMC supporting the views of Flannery and Protopapadakis (2002), Raymond (2009), Maku and Atanda (2010), Kohout (2010), Veselá (2010), Eze (2011), Ahmed and Suliman (2011), Ossisanwo and Atanda (2012), Chude and Chude (2013), Mirza and Hashem (2013), and Haruna et al (2013); that the supply of money has a significant impact on Asset prices. Furthermore, the Impulse Response and Variance Decomposition test indicate both positive and negative shocks which are in consistent with our findings from the VECM and Granger causality analysis. Overall, all the results obtained are in line with apriori expectation. A policy direction is that the CBN can use Money supply as a monetary policy tool to effect changes in growth levels in the stock markets in Nigeria.

Keywords: Broad Money Supply, Asset Prices, Unit Root Test, Vector Error Correction Model, Granger Causality Test, Impulse Response and Variance Decomposition Test