Testing Neutrality of Money for Nigeria: A Nonparametric Cointegration Approach

This paper uses nonparametric integration and cointegration procedures to test the neutrality hypothesis for Nigeria. The broad money supply series (M2) is decomposed into anticipated and unanticipated components using the Hodrick-Prescott filter. The Breitung and Lobato-Robinson nonparametric unit root methodologies are used to determine the time series properties of real output, inflation, anticipated and unanticipated broad money supply. The data covers the period from 1970:1 through 2002:4. The cointegration test is conducted through Breitung's (2002) nonparametric cointegration technique. The unit root tests indicate that real output, inflation, anticipated and unanticipated broad money supply have one order of integration. The results from Breitung's (2002) study provide evidence in support of the long-run relationship between unanticipated money and real output on one hand and between unanticipated money and inflation on the other. The null hypothesis of no cointegration between anticipated money and real output could not be rejected. The finding that unanticipated money is cointegrated with real output is consistent with the rational expectations hypothesis. From a policy perspective, the results suggest that the effect of monetary policy in Nigeria depends on whether it is anticipated or unanticipated.