Impact of Sub-Economic on Money Supply in Nigeria: An Autoregressive Distribution Lag (ARDL) Approach

The escalation in dollar rates and the price instability in the Nigerian economy went through some significant structural and institutional changes such as the liberalization of the external trade, the elimination of price and interest rate controls, and the adoption of a managed float exchange rate system as well as the changes in monetary policy including innovations in the banking sector. Hence, the study examines the impact of financial development on money demand in Nigeria by means of ARDL approach. It examined the quarterly returns of M2, exchange rate (EXR), inflation rate (IFR), currency in credits to private sector (CPS) and circulation (CIC). The data span from 1991 to 2018. The study utilizes regression model techniques where the regression model’s residual is tested for Cointegration using Engle-Granger residual approach, the significances of the variable’s co-movement are checked by pairwise Granger Causality tests and ARDL and VECM are estimated in order to account for the short run and long run relationship among the variables. From the empirical results, Engle-Granger residuals and pairwise Granger Causality tests confirm cointegration among variables. The ARDL and VECM confirm the long run relation between money demand (M2) and financial development variables: CPS and CIC. ARDL models (short run relationship) are estimated for exchange rate and inflation rate. Long run (VECM) analysis has confirmed significance of financial development variables (CPS and CIC) with positive sign;implies that money demand function is stable in long run. The VECM granger causality results reveal that bidirectional causality exists between currency in circulation and money demand in both short and long run. Unidirectional causal relationship exists between credits to private sector and money demand in both short and long run. Hence, government should pay more attention on financial development and ensure a coordination of both fiscal and monetary policy.