Money demand function in nigeria: an ardl approach

This paper employed the cointegration-based autoregressive distributed-lag (ARDL) modelling technique to examine the money demand function (MDF) and its stability in Nigeria from 1986 to 2018 using quarterly time series data sourced from the publications of the Central Bank of Nigeria (CBN) and the World Bank. An empirical model was formulated, estimated, and validated. First, the results indicate that a stable money demand function (MDF) can be established in Nigeria when crude oil price, exchange rate, interest rate, and income variables are included in the money demand model. Second, the money demand function in Nigeria is highly expectations-driven. Thirdly, whereas crude oil price, exchange rate, interest rate, and income have significant relationships with the short-term movements in money demand, foreign reserves and inflation do not have significant relationships with short-term movements in money demand in Nigeria. Furthermore, changes in expected money demand have negative t short and long-term effects on current money demand; income has negative short and long-term effects on current money demand; crude oil prices have positive short and long-term effects on current money demand; exchange rates have negative and positive short-term effects on current money demand; and interest rates have negative and significant short-term effects on current money demand. Based on the findings, it is recommended that the monetary authority should ensure a clear-cut distinction between short run and long run objectives. Thus, the monetary authority can use the previous crude oil prices and previous exchange rates to improve on the level of money demand in the short run; the expected money balances, the current exchange rate, the current interest rate, the current income, and expected income to reduce the level of money demand in the short run; the expected money balances and expected income to reduce the money demand in the long run; and the expected crude oil prices to increase the money demand in the long run.