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Exchange Rate and Demand for Money in Nigeria

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  • BigBen Chukwuma Ogbonna

    (Department of Economics, Ebonyi State University, Abakaliki, Nigeria)

Abstract

This study is designed to examine empirically the impact of exchange rate on the stability of demand for money in Nigeria where official and black market exchange rates operate side by side due to exchange controls. Variants of money demand model are estimated using monthly data for the period of 2005-2013. Cointegration and system equation techniques combined with CUSUM and CUSUMSQ tests are employed in the data analysis. Results indicate that in all the variants of the money demand model, coefficients of exchange rates variable (official or black market exchange rates) manifest significant t statistics, meaning that the null hypothesis of restricting the coefficients of exchange rates in money demand model in Nigeria is rejected for each variant. This suggests that coefficient of exchange rates variable (OMEXR or BMEXR) belongs to the cointegrating space in all the instances. Judging from the freakiness of the coefficients of the variants of the money demand function and the results of the tests for stability of the models combined, the most appropriate demand for money function for Nigeria appear to be the one that includes M1, the interest rate, inflation rate, and official exchange rate. This implies that in Nigeria, a greater percentage of the foreign exchange demand may be public sector driven and substantial percentage of the private sector foreign exchange needs is sourced from the official exchange rate market due to the substantial disparity between the two rates. This may mean consumers¡¯ easy access to official exchange rate and transparency in the operation of official exchange rate market in Nigeria.

Suggested Citation

  • BigBen Chukwuma Ogbonna, 2015. "Exchange Rate and Demand for Money in Nigeria," Research in Applied Economics, Macrothink Institute, vol. 7(2), pages 21-37, June.
    • Handle: RePEc:mth:raee88:v:7:y:2015:i:2:p:21-37
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    References listed on IDEAS

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    Cited by:

    1. Charles O. Manasseh & Ifeoma C. Nwakoby & Felicia C. Abada & Felix C. Alio & Ogochukwu Okanya, 2021. "Money Demand in Nigeria: Application of Autoregressive Distributed Lag Approach," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(4), pages 308-321, April.
    2. Samuel Tawiah Baidoo & Hadrat Yusif, 2019. "Does Interest Rate Influence Demand for Money? An Empirical Evidence from Ghana," Economics Literature, WERI-World Economic Research Institute, vol. 1(1), pages 24-36, June.

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