Another Look at the Transactions Demand for Money in Nigeria
198 Pages Posted: 30 Jun 2014
Date Written: December 2002
This study sets out to model non-bank public’s desired holdings of five different measures of money in the Nigerian economy. These are currency outside banks (COB), demand deposits (DD), narrow money (M1), quasi money (QM), and broad money (M2).
The study addresses many of the pitfalls involved in the empirical modelling of the well established theory on transaction demand for money with data from an economic setting where there is no consensus in the literature on what constitutes ‘relevant background information’ that must guide the choice of empirical proxies for the variables suggested by theory.
The study also explores alternative approaches for dealing with these choices and demonstrates the sensitivity of the modelling outcomes to the different empirical specifications and econometric estimators. It found that some of the approaches suggested in extant literature on Nigeria lead to dead ends, and suggests fruitful alternatives. In particular, it demonstrates the extent to which interest rates could be informative in Nigeria, both in the context of money demand modelling and in the more general context of predicting future economic activity.
The study recovers economically sensible and econometrically sound empirical models of long- and short-run demand for only two of the five measures of money: M1 and DD. No meaningful empirical money demand models could be recovered COB, QM and M2. The study identifies rival modelling frameworks that might be fruitfully explored to model COB and M2 in Nigeria, and show some initial empirical results. None of the frameworks seemed capable of explaining QM in Nigeria. Again, it is shown that a possible line of research in the near future is the separate modelling of its two components, savings and time deposits.
The study closes with a discussion of the economic insights from the qualitative and quantitative attributes of the long and short run models recovered for M1 and DD, and highlight their implications for monetary policy.
Keywords: Money demand, narrow money, broad money, MB, COB, M1, DD, QM, M2, deflator, scale variable, interest rates, yield curve, yield spreads. own-price, cross-price, own rate, opportunity cost, transaction shocks, portfolio shocks, emerging markets, Nigeria
JEL Classification: C51, E41, E44, O16, N27
Suggested Citation: Suggested Citation