Empirical Characteristics of Money in Nigeria

There is a marked tendency to treat outside money, inside money and quasi money alike as if they can be explained by the transactions money demand function in extant empirical studies of money demand in Nigeria. This paper examines the appropriateness or otherwise of applying the transactions demand framework across the aggregates available for Nigeria. The five aggregates that have been modeled in extant literature are currency outside banks (COB), demand deposits (DD), narrow money (M1=COB+DD), Quasi Money (QM), and Broad Money (M2), which is the sum of M1 and QM. A sixth aggregate that has not been modeled is the monetary base (MB). The objective is to classify the six aggregates into those that can rightfully be modeled within the transactions' demand framework and those that are more likely to be appropriately modeled within rival approaches such as the Granger-causality or the money multiplier frameworks. We found that while the relationship between inside money (demand deposits) and real activity in Nigeria can be captured by transactions' demand function, outside money aggregates like currency outside bank (COB) and monetary base (MB) are not determined by real activity and interest rates in Nigeria. The significant differences in the relations of outside and inside money aggregates to real activity in Nigeria is that inside money is endogenous to changes in real activity and interest rates, while outside money is not. While the two components of narrow money are related to real economic activity in qualitatively and quantitatively different ways, demand deposits seem to dominate currency outside banks once both are added to define M1. Quasi-money could not be explained by a transactions demand function. Broad money (M2) could similarly not be explained by a transactions demand function.