TITLE:
Impact of Sub-Economic on Money Supply in Nigeria: An Autoregressive Distribution Lag (ARDL) Approach
AUTHORS:
Yasin Abdelhaleem Yasin Abuhabel, Samuel Olayemi Olanrewaju
KEYWORDS:
Sub-Economy, Money Supply, ARDL, Cointegration, Error Correction Model
JOURNAL NAME:
Open Journal of Statistics,
Vol.10 No.3,
May
9,
2020
ABSTRACT: The escalation in dollar rates and the price
instability in the Nigerian economy went through some significant structural
and institutional changes such as the liberalization of the external trade, the
elimination of price and interest rate controls, and the adoption of a managed
float exchange rate system as well as the changes in monetary policy including
innovations in the banking sector. Hence, the study examines the impact of
financial development on money demand in Nigeria by means of ARDL approach. It examined the quarterly
returns of M2, exchange rate (EXR),
inflation rate (IFR), currency in credits to private sector (CPS) and circulation (CIC). The
data span from 1991 to 2018. The study utilizes regression model techniques
where the regression model’s residual is tested for Cointegration using
Engle-Granger residual approach, the significances of the variable’s co-movement are checked by
pairwise Granger Causality tests and ARDL and VECM are estimated in order to account for the short run and long run relationship among the variables. From the empirical results, Engle-Granger
residuals and pairwise Granger Causality tests confirm cointegration
among variables. The ARDL and VECM confirm the long
run relation between money demand (M2) and financial development
variables: CPS and CIC. ARDL models (short run relationship)
are estimated for exchange rate and
inflation rate. Long run (VECM) analysis has confirmed significance of financial development variables
(CPS and CIC) with positive sign; implies that money demand function is stable in long run. The VECM granger causality results reveal that bidirectional causality exists between currency in circulation and money
demand in both short and long run. Unidirectional causal relationship exists
between credits to private sector and money demand in both short and long run.
Hence, government should pay more attention on financial development and ensure
a coordination of both fiscal and monetary
policy.