A Cointegration And Error Correction Approach To Broad Money Demand In Nigeria

This study considered the stability of broad money demand function in Nigeria using data for 1970 to 2004. The study applied the Cointegration and error correction approach The Johansen Cointegration test shows that long run equilibrium relationship exists between broad money demand and its determinants. While the variance decomposition analysis shows that a high proportion of broad money and its determinants are explained by their own innovation at the end of ten years, the impulse response shows that one standard deviation shock on broad money induces more broad money. Also innovations to income and interest rate induce more broad money demand. The result shows that broad money demand Granger causes inflation rate and not the other way round. It also reveals that income Granger causes inflation rate and interest rate. The Recursive Residuals, Cusum and the Cusum of Squares show that the broad money demand is stable in Nigeria. Keywords: Broad Money; Granger; Causality; Error CorrectionJORIND Vol. 6 (1) 2008: pp. 12-1