Stylized Facts on Demand for Money in Nigeria

15 Pages Posted: 14 Jan 2006

Date Written: January 2006

Abstract

This paper distils the key lessons from a comparison of the qualitative and quantitative attributes of the empirical models recovered for M1 and DD (see Teriba (2006a and b)), with emphasis on the tradeoffs that the two models present for policy makers. Highlights:

Similarities a. Domestic absorption, not gross domestic product, is the relevant measure of transactions in the empirical models for M1 and DD in Nigeria.

b. By extension, domestic absorption deflator, not consumer price index, is the relevant proxy for the general price level in M1 and DD models.

c. To be valid, empirical models for M1 and DD must include at least two domestic interest rates, as proxies for the own rate and the opportunity costs.

Differences d. Foreign deposits are substitutes to DD, as the foreign interest differential enter the cointegrating vector for DD, but not the one for M1.

e. Also, the long run responses of DD to domestic interest rates are more statistically significant than the responses of M1. The short run responsiveness of M1 and DD to interest rates is similar.

f. Domestic and foreign portfolio effects therefore play stronger roles in the DD model in the long run than they do in the M1 model, in which transaction shocks are dominant in the long run.

g. The short run model for M1 has much higher explanatory power with higher statistical significance levels for the (as few as eight) elasticities estimated in the final model.

h. Speed of adjustment of M1 to equilibrium is faster and more certain than that of DD: while M1 readjusts to equilibrium within two quarters; it takes nearly three quarters for DD to adjust.

i. The dynamics of M1 holdings involve lower uncertainty and higher predictability, making M1 more reliable for policy inferences than DD.

j. The short run model for M1 is suitable for out-of-sample forecasting, while the DD model is not, given the absence of reverse-causality from real activity to M1 in the dynamic model.

Keywords: Money demand, deposits, narrow money, interest rates, M1, DD, emerging markets, Nigeria

JEL Classification: C51, E41, O16

Suggested Citation

Teriba, Ayo, Stylized Facts on Demand for Money in Nigeria (January 2006). Available at SSRN: https://ssrn.com/abstract=874628 or http://dx.doi.org/10.2139/ssrn.874628

Ayo Teriba (Contact Author)

Economic Associates ( email )

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PO Box 70909
Victoria Island Lagos
Nigeria
+234 1 461 0802 (Phone)
+234 1 461 0805 (Fax)

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