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Testing the Validity of the Long Run Neutrality of Money in Nigeria

Author

Listed:
  • Ugwu Ephraim

    (Department of Economics, Federal University, Oye-Ekiti, Nigeria)

  • Ehinomen Christopher

    (Department of Economics, Federal University, Oye-Ekiti, Nigeria)

  • Nwosa Philip

    (Department of Economics, Federal University, Oye-Ekiti, Nigeria)

  • Efuntade Olubunmi

    (Department of Economics, Federal University, Oye-Ekiti, Nigeria)

Abstract

Research background: There is no consensus among scholars on the interaction effect between money supply, price, and wages despite various studies conducted to that effect. Purpose: This study investigates whether the neutrality of money assumption holds in the long run in Nigeria, using annual data from 1970 to 2018. Research methodology: The study utilized the Johansen cointegration test and the Vector Error Correction (VECM) approach for estimation. Results: The results from the Phillips curve model contradict the classical school of economics assumption that money is neutral in the long run. This implies that in the Nigerian economy, money is not neutral in the long run. The long run Fishers’ effect model shows that the coefficient of LOG (CPI) exhibits a negative sign and is statistically significant at a 5% significant level, thus contradicting the hypothesis which states that a one percent increase in consumer prices will lead to an increase in the rate of interest by one percent. The coefficient of nominal money supply indicates a negative sign and insignificant statistically on the interest rate. The Short-run estimated results showed that the coefficient of the error correction term ECM (–1) indicates a negative sign and is significant statistically in the Fishers’ effect model. The result shows the actual and equilibrium values are corrected with adjustment speeds equal to 31% yearly. Novelty: The study recommends that the Central Bank of Nigeria should ensure an effective implementation of monetary targeting measures in fine-tuning the economy and curbing inflationary pressures.

Suggested Citation

  • Ugwu Ephraim & Ehinomen Christopher & Nwosa Philip & Efuntade Olubunmi, 2021. "Testing the Validity of the Long Run Neutrality of Money in Nigeria," Folia Oeconomica Stetinensia, Sciendo, vol. 21(2), pages 148-167, December.
    • Handle: RePEc:vrs:foeste:v:21:y:2021:i:2:p:148-167:n:6
    DOI: 10.2478/foli-2021-0021
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    References listed on IDEAS

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    More about this item

    Keywords

    Money neutrality; money supply; Phillips Curve; Fisher effect; cointegration; VECM;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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