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This study examined the demand for money in Nigeria between the period 1980 and 2014 employing various techniques of econometric analysis. The study made use of annual time series data spanning 35 years on broad money demand (MD), gross domestic product (GDP), interest rate (INT) and inflation rate (INF) sourced mainly from Nigeria statistical bulletins. The objectives of the study are: To determine whether Keynes liquidity preference theory holds in Nigeria and to ascertain whether money demand function is stable in Nigeria. The study employed multiple regression analysis using Augmented Dickey-Fuller unit-root test for stationarity, Johansen co-integration for long run equilibrium and CUSSUM stability test. The Augmented Dickers Fuller (ADF) unit root test showed that the variables are stationary while trace statistics from the Johansen co-integration test indicated four-cointegrating equations. To ascertain the elasticity of money demand with respect to the chosen explanatory variables, the study made use of error correction mechanism (ECM) which gave a positive relationship between money demand (MD) and gross domestic product (GDP), a positive relationship between money demand (MD) and inflation rate (INF) and a negative relationship between money demand (MD) and interest rate (INT). The study found that money demand function is stable in Nigeria for the sample period and that income proxied by gross domestic product (GDP) is the most significant determinant of the demand for money. The study recommended among others that since empirical investigation shows evidence of stability in money demand function, it implies that monetary targeting is feasible in Nigeria, hence monetary authority should ensure the manipulation of money supply using monetary policy to regulate the economy.



  • Background of the Study

The important a well-specified demand for moneyand incarryingoutmonetary policy is of great essences in the literature. According to Goldfield (1994), assert that“relationshipbetween the demand for money and it main determinant is an important building block in macroeconomic theories and is a crucial component in the conduct of monetary policy”. This is to say, that both develop and developing countries has paidalmost attention in the demand for money literature. Demand for money and it determinant has formed bases for macro-economics theories formulation and it implementation.

It has performed a very significant roles in the days of old,, its still playing it now and it will continue to play it in years to come. Either develop or developing countries as firmed that increaseincrease in national output (GDP) or what can be referred as economic growth cannot be possible without money (Abiola and Egbuwalo, 2012). Without money nations of the world cannot be able to achieve significant growth in national output.

The money demand function is a measure of identifying both as medium term growth for money supply and as a mean of manipulating interest rate as well as reserve money for the aim of controlling total cash in the economy and also in inflation control. Central bank of Nigeria’s dependent on the demand for money function in the implementations of monetary policies is based on the assumption of stability in long-run relationship betweenmoney, price, real output and other major economic variables.`

The importance of money demand function has encourage a wide range of economist to practical study its determinant and stability. But, while the money demand literature has focused on bothindustrialized as well as less industrialized countries, there are relativelyfew studies examining the money demand function in transition economies. According to(Payne, 2003) “The relative absence of empirical money demand studies for transition economics is partly due to the relative instability of these economics in the transition process itself as well as concerns over the reliability and frequency of the time series data”.

The study of demandfor money is accorded to the fact that monetary policies will only be active if the demand formoney function is table. Stability of the demand for money is vital in studying and understanding the behavior of important macro-economic variable (Essien, Onwioduokit and Osho. 1996). From the study of demand for moneyquestion arises whyindividuals do prefers to hold cash insists of investing it? Answering this question has attracted the interest of great economist from living Fisher in the early 1900s to John Maynard Keynes in the early 1950s and1930s, to Willian Baumo, James Tobin andMilton Friedman from the 1950s and on.

Keynes (1936) had a great impact on theory of demand for money function. He introduced a conceptual framework that fostered the development of all moderntheories. Today, Keynes is known today as the father of modern theories of money demand. According to Keynes, individuals demands money for three main motives which includes, transactionary, precautionary and speculative motives. In Keynes tradition the demand function for money id formulated as id there are twoseparate amounts of money  demanded for two broad needs (Mai-Lafia, 2002); first, transactions and financial needs for the effectuation of exchanged of goods and services by business enterprise and individuals. Second, precautionary and speculative needs corresponding, respectively, to the desire for security to have in future cash balances equivalent to a certain proportion of total resources, and to the objective of securing profits from better knowledge of the behavior of financial markets.

Fromthe 80smany countless deregulation and liberalization policiesof Apex Banks in manydevelop economics has moved betweeneconomic tools of money shifting away from policies that influences the money supply towards those which influence the bank rate. A large number of developed country case studies, shows that the demand for money has become unstable due to financial reforms and hence supportthe targeting of the rate of interest byapexbanks (Maki and Kitasaka, 2006; Caporala and Gil-Alana, 2005).

The Apex banks in many developing economics has followed suit and shifted towards monetary policies at the bank rate.The main part of this policyshifting is based on the view that their own financial market reform and liberalization might have beenthe causeto the instability in their owndemand for money function.

However, current studies have raised doubt on the validity and strength of ApexBank interest rate targeting toward developing economics (Bahmani-Oskooe and Rehman, 2005, Raoetoal, 2009). It is argued that the choice of bank rate as atool instrument of monetary policy may result to stable money demand as against financial market liberalization perceived by industrial economics before the recent financial meltdown. If that is the case then, it would be proper to test for the stability of money demand in the developing country like Nigeria. Few studies inNigeria have been conducted on the stability of money demand function in Nigeria. Particularly since the 1986structural policy shift (Owoye and Onofoora, 2007). Many indices have been designed in these study which agree that there is stability in money demand functionin Nigeria.However, none of the researcher studies have tried to open to Nigeria economy in their submission.

Studyfor the stability of money demand functionhas gone unabated and the analysis of previously stable relationship has led to re-modeling of variables of models throughout the post-warera and make sure that searchcontinues (Carpenter and Lange, 2002). Efforts toshow the determinant and stability of the demand for money function in Nigeria dates back to the early 1970s. Tomori (1972)“generated a lot of debate in what is now known as the “tattoo debate” on the subject matter and consequently led to further empirical investigations of the issue”.

Mai-Lafia (2002), while examining the cost of credit (interest rate) in Nigeria pointed that facts, that the interest rate dispute is related to allocation of savings between money and other financial assets. According to him, there exists an inverse relationship between the desire to hold money and the desire to invest.Borrowers in need of credit are able to attract such funds from savers to long as they succeed in creating money-substitutes which have the effect of reducing the demand for money as a form of holding wealth. For example, when shares are substitutes for money, and increase in distributive dividends will induce a reduction in the demand for cash balances and this, in turn will favour investment of such balance in shares.

However, a stable money demand allows for better predictionof the effect of monetary policy on interest rates, output, and inflation and therefore reduces the possibility of an inflation bias (Cziraky and Gillman, 2006)., a stable demand function for moneymeans that the quality of money is predictably related to a smallset of key variables linking  money to the real sector of the economy (Judd and Scadding, 1982). In this paper, we provide further evidence on the issues for demand for money by modeling the empirical relationship between narrow money, income, interest rates and inflation.


2.Statement of the Problem

The level and stability of the demand for money has received enormous academic attention because an understanding of its causes and consequences can usefully inform the setting of monetary policy. Carpenter and Lange (2002) opined that the stable money demand function has long been sought after because it can be very useful for explaining and ever predicting the behavior of other aspects of the macro-economy.

They furthercontended that, in traditional formulations, money demand is a function of scale variable, like nominal GDP, and the opportunity cost is known as holding money. If the elasticitywith respect to the opportunity cost in knownand the relationship between money and GPD is stable, then the observation of money data, which tend to be relatively high frequency, can help to predict nominal output, which is observed at a lower frequency. According to them, while both of those conditions are important, it is the second that is most often called intoquestion.

Nigeria instituted the IMF’s structural Adjustment program (SAP) in 1986 with the aim of putting the economy on the path towards a drastic reduction in international debt; sadly this program was abandoned in 1988. Such economic and political structural changes exerted significant influence in a range of economic relationship. These included high inflation rate, structural unemployment and decline in productively and high interest rate.Presently, interest rate has been on the increase and thus small scale enterprises have not been able to obtain loan-able funds resulting in declining economic activities while prices are continuously rising. This is resulted in under capacity utilization, closure of many business premises; and general low economic activities.

The above challenges have been attributed to incompetency poor management of monetary policiestogether with high levelof corruption in the country. This increasing gap in managing public resources in term of policypronouncementand its implementation, transparency, accountability has been lacking causing instability and inconsistence in monetary policy function.. There are seriousresourceslimitation and uncertainties and also remarkable slow down in implementation of policies if this, has usually made it difficulty for the monetaryauthorizes in developing and developed economy to target stability in their money demand especially in Nigeria. In addition, government fiscalcarelessnesshas given raise to difficultfinancing and this has caused inflation which contradicts the fundamental monetary policy objective of price stability. This has the potentials of destabilizing the macroeconomic productivity and development and the difficulties of conducting monetary and fiscal policies in a regulated environment and in an era of globalization (Ohwofasa and Mayuku, 2012; Mayuku et al, 2012).

The major problem of money demand in Nigeria is therefore the problem of persistent inflationary pressure unemployment, money reserve ratio and interest rate in spite of monetary policy measure adopted and applied over the years. There is also this problem of general feeling that a continuous decrease in interest rate will adversely increase the rate of money demand which will lead to inflation and which may deny the intended effects of use of monetary policy. It is therefore vital to investigate and test the stabilityof money demand since it will enable policy makers to select the correct monetary policy instrument since selecting the wrong instrument may in large fluctuations in output

3.Research Questions

The following research question were designed to guide this study:

  1. Does Keynes liquidity preference theory hold in Nigeria?
  2. Is the demand for money stable in Nigeria?


  1. Objectives of the Study

The main objective of the study is to examine money demand function in Nigeria while its specific objective is to the:

  1. To determine whether Keynes liquidity preference theory hold inNigeria
  2. To determine whether there is stability money demand function in Nigeria
  3. Hypotheses of the Study

Hypotheses tested in this study are stated below:

  1. Keynes liquidity preferences theory does not hold in Nigeria
  2. Money demand function is not stable in Nigeria
  3. Significance of the Study

This research work will help us to examine into thebenefit of the control of money demand in Nigeria in the bid towards the attainment of the goal of economic growth and development. It will also add to the already literature available about the determinant and stability of money demand in Nigeria and will equally help students, government, policy makers and business entities in areas relating to monetary policy, money demand and economic growth stabilization.

  1. Scope of the Study


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