Divisia Monetary Aggregates and Demand for Money in Nigeria
Journal Title: International Journal of Financial Economics - Year 2016, Vol 5, Issue 2
Abstract
The Nigerian financial system has undergone several transformations over the past few decades leading to financial innovations. These innovations have altered the definition and use of monetary aggregates as a monetary policy tool. The conventional simple sum aggregates were identified with an aggregation bias. The economy has experienced series of monetary and financial problems which requires further investigation into the causes and remedies. This paper construct the Divisia monetary aggregates (DM1 and DM2) for Nigeria using the Barnett 1980 Divisia index. Descriptive statistics were used to compare the simple sum and Divisia monetary aggregates. Using a data for 2000:1 to 2015:4 obtained from the International financial statistics (IFS) of the IMF, the study employs the ARDL approach to cointegration and estimated the demand for money function using the newly constructed Divisia aggregates. The findings suggest that Divisia aggregates performs better in explaining the variations of monetary stock in the economy. The result indicates a long run cointegration between the Divisia monetary aggregates and income, inflation, interest rate and exchange rate. Using the CUSSUM and CUSSUMSQ it was established that the demand for money is stable with the Divisia aggregates. Monetary policy should focus on monetary targeting rather than the short-term interest rate targeting. The CBN could benefit by using the Divisia monetary aggregates to better monitor output growth and inflation movements.
Authors and Affiliations
Shehu El-Rasheed, Hussin Abdullah
Keywords
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The Nigerian financial system has undergone several transformations over the past few decades leading to financial innovations. These innovations have altered the definition and use of monetary aggregates as a monetary...