Monetary policy. Empirical Determination of the Concept of Money in Nigeria Using Both Narrow and Broad Concept of Money (M1 and M2)


Term Paper, 2016

13 Pages, Grade: A


Excerpt

Table of Contents

1.1 BACKGROUND TO THE STUDY
1.2 STATEMENT OF THE PROBLEM:
1.3 OBJECTIVES OF THE STUDY
1.4 SCOPE OF THE STUDY
1.5 SIGNIFICANT OF THE STUDY
1.6 ORGANISATION OF THE STUDY

2.0 LITERATURE REVIEW
2.1 THE CONCEPT OF MONEY
2.2 THE CONCEPT OF MONEY SUPPLY
2.3 MONEY SUPPLY MEASURES
2.4 THE MONEY SUPPLY MEASURE “M1”
2.5 THE MONEY SUPPLY MEASURE “M2”
2.6 EMPIRICAL LITERATURE

3.0 METHODOLOGY
3.1 MODEL SPECIFICATION
3.2 ESTIMATION AND VALIDATION OF THE MODELS
3.3 SOURCES OF DATA
3.4: LIMITATIONS

4.0 PRESENTATION AND ANALYSIS OF RESULTS
4.1 PRESENTATION OF RESULTS

5.0: SUMMARY AND CONCLUSION
5.1: SUMMARY
5.2: CONCLUSION

REFERENCES

ABSTRACT

To reconcile the lack of consensus on the appropriate concept of money in Nigeria using a 45 year time series data from 1970 – 2014 and employing the Ordinary Least Squares (OLS) estimation techniques to estimate two equations for both monetary aggregates (M1 and M2). Findings shows that the principal explanatory variable (GDP) on both models has a positive and significant impact on both monetary aggregates, but the impact was more felt in the broad money supply measure (M2). It was concluded that the broad money supply measure defines the appropriate concept of money in Nigeria.

1.1 BACKGROUND TO THE STUDY

Everyone uses money. We all want it, work for it and think about it. Some go the extra mile of violently and illegally dispossessing others for it. Money has been and would be the obsession of many. The engine and oil of modern economies the world over is money.

From the ancient times, the concept, meaning and supply of money has evolved as societies are transformed. Hence, with the phasing out of trade by barter – a system of exchange of goods for goods, different commodities have defined the concept of money even up to the money period. Commodities like salt, cowries, stones, metals, gold etc. have served as money.

In modern times, gold, coins, paper notes etc. have already constituted the main form of money. Money supply simply refers to the amount of money in an economy (Obafemi, etal; 2009). What constitutes money supply in one economy is different from that of other countries. It means the appropriate concept of money in Nigeria is much different from that of developed countries for example; the United States of America and the United Kingdom. This difference lies in the relative development of the financial sector and financial instruments in the different economies (Anayo; 2005).

1.2 STATEMENT OF THE PROBLEM:

With the implementation of the Structural Adjustment Programme (SAP) in Nigeria in 1986, the economy was liberalised. There was deregulation of exchange rate, interest rate and the economy became capitalist oriented. Here, the changing trend of macroeconomic variables was market determined, without political manipulation. The monetary authority in Nigeria which is the Central Bank of Nigeria (CBN) reports several distinct measures of the aggregate money supply. The narrowest measure, M1 includes only the most liquid assets. Higher numbers following an “M” reflect broader measures of money that includes less liquid assets.

However, there is the problem of lack of consensus on the appropriate concept of money the world over. Different countries are at different levels of economic development. Therefore, they differ greatly in their level of financial development and the component of financial instruments. Developed countries with a highly developed financial sector have broader measures of money supply whereas; less developed countries have a narrow measure of money supply.

In Nigeria, there is no consensus on the concept of money as the Central Bank of Nigeria reports two different measures of money supply. This study is basically designed to answer the question of appropriate concept of money in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to determine the appropriate concept of money in Nigeria. Specifically, this study seeks to:

1. Evaluate the impact of some macroeconomic variables on the narrow money supply measure (M1).
2. Ascertain the relationship between some macroeconomic variables and the broad money supply measure.

1.4 SCOPE OF THE STUDY

This study focuses on the Nigerian economy and it is specifically based on the financial sector. It revolves around money supply and monetary policy. The study is restricted to the time period from 1970 – 2014.

1.5 SIGNIFICANT OF THE STUDY

This study is significant in the following ways:

i. It will contribute to existing literature on the concept of money in Nigeria.
ii. It will assist policy makers to evolve the appropriate policies on the concept of money supply in Nigeria.

1.6 ORGANISATION OF THE STUDY

This study is organized in sections. Following the introduction, section two focuses on literature review. Section three is based on methodology while section four dwells on presentation and analysis of results. Finally, section five looks at summary and conclusion.

2.0 LITERATURE REVIEW

This section focuses on literature review by considering both theoretical and empirical literature.

2.1 The Concept of Money

Money has been considered by Agba (1994) to be defined in various approaches. These approaches are functional (functions of money), empirical (components of money in research), legal (what the law says it is) and liquidity (the ease with which it can be converted to cash).

2.2 The Concept of Money Supply

Money supply simply refers to the amount of money in an economy (Obafemi et al; 2009). Money supply has a close association with liquidity. A liquid asset is one which is easily spendable, transferable and has capital certainty. Thus, money supply is the amount (stock) of all liquid assets in the economy. It could also be a flow when considering the money supply over a period of time.

2.3 Money Supply Measures

There are various measures of money supply depending on the system. For the purpose of this study, we are looking at “M1 and M2”.

2.4 The money supply measure “M1”

M1 consists of the most highly liquid assets (Oden, 2000). It consists of coin and currency in circulation, traveller’s checks, demand deposits and other checkable deposits. In Nigeria, the officially recognized components of M1 money supply are currency outside banks and demand deposits i.e.

Abbildung in dieser Leseprobe nicht enthalten

2.5 The money supply measure “M2”

M2 is a broader measure of money than M1. It includes all of M1 and a collection of less liquid assets, for example, fixed or time deposits (Anayo, 2005).

M2 = CC + DD+ TD

Where: M2 = Broad money supply measure

TD = Time deposits

2.6 EMPIRICAL LITERATURE

Studying the concept of money in India, Shaga (2003) employed the error correction mechanism. Results revealed that M2 is a better measure of money in India on the long-run.

While attempting to identify the appropriate definition of money in Nigeria, Ojo (1978) adopted Chetty’s theoretical approach with the use of 1961-1979 data and found that the wider definition of money is more appropriate when measuring national income in Nigeria.

Applying the econometric techniques to investigate the impact of money supply on economic growth in Nigeria between 1980 and 2006, a study by Ogunmuyiwa and Ekone (2010) showed money supply has a positive but insignificant relationship with gross domestic product.

Ebuka and James (2008) studied money supply measures in Nigeria using the ordinary least square estimation technique. Funding showed that the broad money supply measure was significant and positive on its impact on the gross domestic product. While, the narrow money supply measure (M1) showed an insignificant impact on economic growth in Nigeria for the period 1990 – 2008.

3.0 METHODOLOGY

This study adopts the ex post facto design to determine the appropriate measure of money supply in Nigeria. This methodology is adopted because the researcher is not involved in the manipulation of the values of the variables i.e. M1, M2, GDP, INTR and INFR.

The econometric technique of ordinary least square is employed in the analysis of the multiple regression equation. The Ordinary Least Square (OLS) is employed because of its blue properties of best linear unbiased estimator. It is efficient and has minimum variance. It also has a fairly simple computational procedure.

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Details

Title
Monetary policy. Empirical Determination of the Concept of Money in Nigeria Using Both Narrow and Broad Concept of Money (M1 and M2)
Course
MONETARY ECONOMIC THEORY
Grade
A
Author
Year
2016
Pages
13
Catalog Number
V509439
ISBN (eBook)
9783346073310
ISBN (Book)
9783346073327
Language
English
Tags
monetary, narrow, both, using, nigeria, money, concept, determination, empirical, broad
Quote paper
Micah Effiong (Author), 2016, Monetary policy. Empirical Determination of the Concept of Money in Nigeria Using Both Narrow and Broad Concept of Money (M1 and M2), Munich, GRIN Verlag, https://www.grin.com/document/509439

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