EFFECT OF INTEREST RATE ON THE STABILITY OF DEMAND FOR MONEY FUNCTION IN NIGERIA
Gwom, Ayuba Usman, Ilemona Adofu, Ph.D and Alhassan Abdulkareem, Ph. D
Volume 11 Issue 1
Abstract
The study investigated the effect of interest rate on the stability of money demand in Nigeria using annual time series data spanning 1986 to 2022. The study used real broad money demand (M2) as the dependent variable, while Lending Interest Rate (LIR), Monetary Policy Rate (MPR), Public Debt (PDT) and Real Gross Domestic Product (RGDP) as independent variables. The Autoregressive Distributed Lag (ARDL) regression was employed based on the outcome of the unit root tests. The bounds cointegration test revealed the presence of long-run relationship between the dependent and independent variables. The findings showed that in the long-run, lending rate (LIR) had an insignificant negative effect on the stability of real broad money demand in Nigeria, while MPR had an insignificant positive effect on the stability of M2 money demand. Public debt (PDT) in the long-run had positive and insignificant effect, Real Gross Domestic Product (RGDP) in the long-run RGDP had significant positive effect on the stability of real broad money demand. The results showed that 72.40 percent of the changes in the stability of Money demand was explained by the explanatory variables and the estimated parameters were found to be stable. The study concluded that interest rate is has no significant effect on the stability of money demand function in Nigeria and recommended among others that the operating cost of deposit money banks should be reduced, and Central Bank of Nigeria should maintain a stable baseline interest rate in order to ensure stability in the demand for money function in Nigeria. Keywords: Interest Rate, Monetary Policy Rate, RGDP, Public Debt, Demand for Money
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