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Impact of Sub-Economic on Money Supply in Nigeria: An Autoregressive Distribution Lag (ARDL) Approach

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Document pages: 27 pages

Abstract: The escalation in dollar rates and the priceinstability in the Nigerian economy went through some significant structuraland institutional changes such as the liberalization of the external trade, theelimination of price and interest rate controls, and the adoption of a managedfloat exchange rate system as well as the changes in monetary policy includinginnovations in the banking sector. Hence, the study examines the impact offinancial development on money demand in Nigeria by means of ARDL approach. It examined the quarterlyreturns of M2, exchange rate (EXR),inflation rate (IFR), currency in credits to private sector (CPS) and circulation (CIC). Thedata span from 1991 to 2018. The study utilizes regression model techniqueswhere the regression model’s residual is tested for Cointegration usingEngle-Granger residual approach, the significances of the variable’s co-movement are checked bypairwise 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-Grangerresiduals and pairwise Granger Causality tests confirm cointegrationamong variables. The ARDL and VECM confirm the longrun relation between money demand (M2) and financial developmentvariables: CPS and CIC. ARDL models (short run relationship)are estimated for exchange rate andinflation 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 moneydemand in both short and long run. Unidirectional causal relationship existsbetween credits to private sector and money demand in both short and long run.Hence, government should pay more attention on financial development and ensurea coordination of both fiscal and monetarypolicy.

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