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A STUDY OF DEMAND FOR MONEY IN NIGERIA BETWEEN 1990 TO 2018

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A STUDY OF DEMAND FOR MONEY IN NIGERIA BETWEEN 1990 TO 2018

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A STUDY OF DEMAND FOR MONEY IN NIGERIA BETWEEN 1990 TO 2018

CHAPTER ONE

INTRODUCTION

1.1     INTRODUCTION

The speech on the demand for money in Nigeria remained active after many years of research and debate on the subject. In the 1990s, Tomori (1972), Ajayi (1974), Teriba (1974), Ojo (1974) and Odama (1974) were pioneers in this field. These discussions and debates attracted much attention from academic and political circles at the time and resulted in the acronym for the “TATOO” debate. Since then, new participants in the discussion have tended to rely on the pioneering work of these great Nigerian scientists. This study is inspired by this work. The issue has remained relevant around the world, mainly because of its importance for macroeconomic management and monetary policy in particular. Policymakers must always know how monetary policy affects the real economy and whether the goal of controlling the currency is important to stabilize prices. In this sense, knowledge of the demand for money will continue to be essential.

Today, some of the policy-related developments that prompted the rigorous inquiry into the demand for money in Nigeria have not changed much. For example, the Central Bank of Nigeria (CBN) adopted in 1974 the monetary stance as a framework for the implementation of monetary policy. The stability of the money demand (Anoruo (2002) and Khan and Ali (1997)) is one of the essential conditions for the successful selection of monetary aggregates. Knowing the arguments for the demand for money is essential in the selection of instruments and objectives, just as the transmission mechanism of monetary policy depends on the arguments of money demand. To date, the Central Bank of Nigeria has continued to designate the currency as its main monetary policy strategy.

 

However, any further attempt to study the demand for money in Nigeria must be vigorously justified. The demand for money itself is a dynamic phenomenon. The determinants of money demand change over time, especially when one considers the growing trends in financial innovation. In the past, many studies have reported, for example, the interest rate neutrality on the money demand function in Nigeria due to the underdeveloped nature of the financial market and the limited range of financial assets. so that instead of substitutes between cash and financial assets, economic agents have tended to substitute between cash and physical assets. It will be interesting and useful to know if this situation has changed given recent milestones in financial deepening.

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During the Great Depression, mentioned above, US officials

from the US Federal Reserve argued that the currency was plentiful and cheap because of low market interest rates and a few banks only.

borrowed This view implies that neither the shortage of money responsible for depression nor the increase in money supply could have alleviated or even prevented depression. Researchers, on the other hand, argued that monetary policies have been adjusted and the money supply has declined and, as a result, general price levels have fallen significantly. In the view of this group, a more aggressive monetary policy response by increasing the money supply and therefore the price level would have limited depression (Seriatis 1988, Wheelock 1992).

Taking the United States as an example, the economic indices of development and welfare (variables that governments around the world are striving to improve) have fluctuated during the crisis as real national income has fallen by 33%. . The price level dropped by 25%, while unemployment went from 4% in 1929 to 25% in 1933. Much of the debate on the Great Depression focused on bank failures. According to David and Wheelock, in 1992, about 9,000 banks with deposits of $ 6.8 million went bankrupt between 1930 and 1933. The situation was similar in the United Kingdom and in several other European countries at about the same level. period.

Interesting questions are raised, such as “have the banks failed simply because of the decline in national income and the demand for money?” “Have banks been a major cause of depression?” and “Are such events possible in developing countries or is the general bankruptcy of Nigeria in the 1950s and 1990s a repetition of the American version?”

Irving Fisher (1932) applied the quantitative theory of money. He argued that changes in the money supply caused a change in the price level.

Assign the level of economic activity over short periods. On the other hand, modern monetarists2 such as Friedman and Schwatz (1963) argued that the banking panic caused a decline in the money supply, which in turn led to a decline in economic activity. Keynesian explanations did not consider banks as causes. Keynesians reject monetary forces as causes of depressions and therefore can not be a useful remedy. Instead, they argued that the decline in business investment and household consumption had forced the reduction in aggregate demand and, as a result, led to a decline in economic activity.

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1.2 Background of the Study

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