1. bookVolume 21 (2021): Issue 2 (December 2021)
Journal Details
License
Format
Journal
eISSN
1898-0198
First Published
06 May 2008
Publication timeframe
2 times per year
Languages
English
access type Open Access

Testing the Validity of the Long Run Neutrality of Money in Nigeria

Published Online: 26 Nov 2021
Page range: 148 - 167
Received: 19 May 2021
Accepted: 22 Oct 2021
Journal Details
License
Format
Journal
eISSN
1898-0198
First Published
06 May 2008
Publication timeframe
2 times per year
Languages
English
Abstract

Research background: There is no consensus among scholars on the interaction effect between money supply, price, and wages despite various studies conducted to that effect.

Purpose: This study investigates whether the neutrality of money assumption holds in the long run in Nigeria, using annual data from 1970 to 2018.

Research methodology: The study utilized the Johansen cointegration test and the Vector Error Correction (VECM) approach for estimation.

Results: The results from the Phillips curve model contradict the classical school of economics assumption that money is neutral in the long run. This implies that in the Nigerian economy, money is not neutral in the long run. The long run Fishers’ effect model shows that the coefficient of LOG (CPI) exhibits a negative sign and is statistically significant at a 5% significant level, thus contradicting the hypothesis which states that a one percent increase in consumer prices will lead to an increase in the rate of interest by one percent. The coefficient of nominal money supply indicates a negative sign and insignificant statistically on the interest rate. The Short-run estimated results showed that the coefficient of the error correction term ECM (–1) indicates a negative sign and is significant statistically in the Fishers’ effect model. The result shows the actual and equilibrium values are corrected with adjustment speeds equal to 31% yearly.

Novelty: The study recommends that the Central Bank of Nigeria should ensure an effective implementation of monetary targeting measures in fine-tuning the economy and curbing inflationary pressures.

Keywords

JEL Classification

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