Faculty: Social Sciences
Department: Economics


Okafor, P. N.
Nwogwugwu, U. C. C.


The topic of this work is analysis of money demand in Nigeria and its implication for inflation targeting. Since the publication of Fisher’s (1957) equation of exchange, the debate about the stability of money demand has continued unabated. In Nigeria, this debate has continued since the era of the “TATOO” debate (that is, the acronym of Tomori (1972), Ajayi (1974), Teriba (1974), Ojo (1974) and Odama (1974)). The major concern is that the stability of money demand is critical for the implementation of monetary policy and inflation control. If monetary authority assumes that money demand is stable, while it is not, its monetary policy implementation could be misguided and this error could engender devastating implications to the economy. Again, to ensure that money demand is stable, there are macroeconomic factors that must be deliberately controlled. Lack of consensus among the various researchers on money demand determinants and stability status, and the use of single equation to estimate money demand in Nigeria, which could be undermined by simultaneity bias, calls for a re-examination of demand for money, and it is against this backdrop that this study re-examined the stability of money demand in Nigeria using expanded variables and simultaneous equation procedure. The study was anchored on Friedman’s theory of money demand within the context of monetarism. The main thrust of this study is to analyse money demand (its determinants and stability) in Nigeria with a view to understanding its implication for inflation control. The study adopted econometric procedure of data analysis using quarterly time series spanning from 1981 to 2017 obtained from Central Bank of Nigeria (CBN) and World Bank Development Indicators. We utilized real money demand as the dependent variable; per capita income, interest rate, expected inflation, stock market returns, financial innovation and effective exchange rate as explanatory variables. We carried out a unit root test and tested for stationarity of data using Elliot, Rothenberg, and Stock Point Optimal method. We tested for cointegration using Phillip-Quliaris cointegration test, as well as carried out an error correction test. Money demand model was estimated using semi-log, two-stage least square simultaneous equation estimation procedure to ascertain the stability status of money demand in Nigeria. We also estimated the inflation model using dynamic ordinary least square to ascertain the impact of the percentage change in real money demand on inflation. The results obtained indicate that real effective exchange rate and financial innovation are significant determinants of money demand in Nigeria. Also that money demand in Nigeria has been unstable since 2009. Again that the income elasticity of money demand in Nigeria is greater than unity (2.32), meaning that money demand is not stable in Nigeria. The findings indicate that money demand is a significant source of inflationary pressure in Nigeria, and that the instability of money demand could be responsible for persistent inflation in Nigeria, which seems to have defied monetary policy responses. We therefore recommend that CBN should concretize its inflation targeting framework.