Broad Money Demand, Financial Liberalization and Currency Substitution in Nigeria

The aim of this paper is to investigate the empirical relationship between broader definition of money, real income, interest rates, inflation and expected exchange rate, and to examine the constancy of this relationship, especially in the light of financial reform, deregulation of financial markets and financial crises. The estimation results show that long-run demand for real balances in Nigeria depends upon real income, on the its own interest rate, interest rates on government securities, inflation and expected exchange rates. Significance of the expected exchange rate variable indicates existence of currency substitution in Nigeria. Our results also reveal that the demand for broad money in Nigeria is stable, despite the economic reforms and financial crises