MONEY DEMAND AND FOREIGN EXCHANGE RISK IN NIGERIA: A COINTEGRATION ANALYSIS USING AN ARDL BOUNDS TEST
The paper estimates the money demand function that incorporates a foreign exchange risk variable for Nigeria using annual time series data (1970-2006). The applied technique of cointegration analysis is the bounds test which involves autoregressive distributed lags (ARDL). Consistent with economic postulates, it is found that (a) the demand for money in the log-run is cointegrated with real income, exchange rate variability, interest rate and inflation; (b) the short-run income elasticity is less than one but greater than zero; (c) inflation is more significant than real income in the money demand function; and (d) the real money demand function is stable.
JEL Classification: C13, C22, E41, E52, F31.
Key words: Bounds test, Money demand, Foreign exchange risk, Autoregressive distributed lags (ARDL), Inflation targeting, Nigeria.